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I  mni  I  i^sTdk  ■  kira  i  iiT^^m  i  iei  r±iii  iirss  va^  vas  aiwr^: 


1906  EDITION.        REVISED  AND  ENLAROED. 

Corporation  Accounting  and 
Corporation  Law- 


A  Manual  of 
CORPORATE  ORGANIZATION 

AND  MANAGEMENT. 


ACCOUNTING  IN  THEORY  AND  PRACTICE 


BANKING 

With         -' 
Special  Reference  to 

The  National  Banking  System 

and  a 
Treatise  on 

UNIVERSITY    I  STOCK  EXCHANGES 
J.  J.  RAHILL,  C.  P.  A. 

Member  California  Society  of  Certified  Public  Accountants. 


An  Appendix  on  the  California  Examinations  for  C.  P.  A.  Certificates,  with  a 
Full  Set  of  Questions  and  Answers,  by 

ALFRED  Q.  PLATT,  C.  P.  A. 

Secretary  State  Board  of  Accountancy  and  Chairman  of  Bxamining  Board 
from  1901  to  1906. 

FRESNO,  CALIFORNIA        -         1906. 

Published  by  the  Author. 


,<^^ 


sehebm: 


Copyrighted  1905 

BY 

•    J.  J.  RAHIIylv,  C.  P.  A. 


AI.I,  RIGHTS  RKSKRVE» 


DEDICATORY 


It  was  chiefly  due  to  the  encouragement 
which  I  received  from  members  of  the  Cal- 
ifornia Society  of  Certified  Public  Account- 
ants, and  especially  to  the  encouragement, 
counsel  and  assistance  which  I  received  from 
its  worthy  president,  Mr.  Alfred  G.  Piatt, 
that  I  undertook  the  publication  of  this 
edition;  therefore  in  token  of  my  faith  in, 
and  friendship  for  this  society,  of  my  belief 
in  its  principles  and  purposes,  and  as  an 
evidence  of  my  appreciation  of  the  support 
and  endorsement  which  I  have  received 
from  it,  I  dedicate  this  volume  to  the 
California  Society  of  Certified  Public  Ac- 
countants. 

J.  J.  RAHILL,  C  P.  A. 


■Vi 


PREFACE  TO  FIRST  EDITION. 

Talking  with  a  friend  a  little  over  four  months  ago,  on 
the  multiplicity  of  corporations,  I  expressed  the  opinion  that 
a  book  devoted  exclusively  to  Corporation  Accounting  and 
Corporation  Law  should  find  favor  among  accountants  and 
others  interested  in  corporations.  He  shared  my  conviction 
and  strongly  advised  me  to  set  about  the  publication  of  such 
a  book.  This  volume  is  the  result  of  my  labors,  performed 
chiefly  at  night. 

There  are  hundreds  of  books  devoted  to  book-keeping  in 
general,  but  none  that  I  know  of  devoted  entirely  to  this  im- 
portant branch  of  the  science  of  book-keeping.  That  this  is 
not  complete  I  own,  that  it  has  its  shortcomings  I  confess, 
but  I  trust  it  will  not  be  judged  by  its  shortcomings  but  rather 
by  such  merit  as  may  be  found  in  it.  I  have  endeavored  to 
make  this  work  more  than  interesting.  My  aim  has  been  to 
make  it  instructive  and  useful  to  the  large  number  of  good 
book-keepers  who  have  not  had  practical  training  in  this 
branch  of  accounting.  No  one  man  knows  all  there  is  to  be 
known  of  any  science  and  I  do  not  claim  to  be  a  master  of  this, 
therefore  I  invite,  and  will  appreciate  friendly  criticism  and 
endeavor  to  profit  by  it  in  the  future. 

Stock  Exchanges  are  so  interwoven  with  Stock  Companies 
that  they  necessarily  form  a  part  of  this  work  and  constitute 
one  of  its  most  interesting  features.  A  digest  of  the  laws  of 
all  the  states  is  also  a  unique  and  very  valuable  appendix. 

That  this  work  will  meet  with  the  approval  of  those  for 
whom  it  is  intended  and  prove  of  some  value  to  the  profession, 
is  the  sincere  wish  of 

THE  AUTHOR. 
December  1899. 


PREFACE  TO  J  906  EDITION. 


The  unexpected  success  of  the  first  edition  of  this  work, 
and  the  fact  that  notwithstanding  the  book  has  been  off  the 
market  for  more  than  four  years  orders  continue  to  come  in 
from  all  over  the  country  and  even  from  over  the  seas,  led  me, 
somewhat  unwillingly,  to  undertake  the  publication  of  this 
second  and  more  complete  edition.  The  first  edition  was  got- 
ten out  primarily  to  meet  a  California  demand  that  existed  at 
the  time  for  such  a  work,  but  the  reception  accorded  the  book 
wherever  it  was  introduced,  has  convinced  me  that  there  is  a 
large  field  for  a  more  complete  and  comprehensive  work  on 
corporation  accounting  and  corporation  law. 

Many  new  economic  conditions  have  arisen,  many  and 
radical  changes  have  been  made  in  the  laws  governing  and 
regulating  corporations,  and  numerous  Corporations,  Mergers 
and  Holding  Companies  have  been  created  under  these  new 
conditions  and  are  being  administered  under  these  new  enact- 
ments, in  a  manner  wholly  different  from  the  past.  This  work 
takes  cognizance  of  present  conditions  and  advanced  legisla- 
tion, and  is  intended  to  supply  the  demand  for  an  up-to-date 
work  on  its  chosen  subjects. 

While  positively  disclaiming  the  role  of  moral  preceptor, 
the  author  has  not  failed  to  call  attention  to  what  he  has  con- 
ceivt-d  to  be  defects  in  the  law,  and  flaws  in  business  ethics, 
and  to  point  out  alike  to  incorporators,  stockholders  and  ac- 
countants the  standards  to  be  attained  and  the  evils  to  be 
avoided  in  respect  to  corporate  organization,  management  and 
auditing. 

The  old  work  has  been  more  than  revised — it  has 
been  rewritten — many  new  chapters  have  been  added,  the 
size  of  the  original  work  has  been  more  than  doubled,  and  the 


quality,  scope  and  value  increased  four-fold.  The  most  ap- 
proved and  advanced  methods  of  corporation  organization, 
management  and  accounting,  are  clearly  explained  and  illus- 
trated. The  issuing  of  all  classes  of  bonds  and  their  amorti- 
zation is  made  a  special  feature.  The  creation  and  extinction 
of  Sinking  Funds  is  treated  in  a  compendious  and  comprehen- 
sive manner.  In  addition  to  the  extended  scope  of  this  work, 
the  appendix  on  C.  P.  A.  examinations,  with  a  full  set  of  ques- 
tions and  official  answers,  should  make  it  one  of  exceeding 
interest  to  accountancy  students  and  ambitious  book-keepers. 
My  aim  and  purpose  has  been  to  make  this  work  a  standard 
authority  on  corporation  accounting  and  corporation  practice, 
and  I  trust  that  those  into  whose  hands  this  book  shall  come 
will  vote  my  aim  accomplished,  my  purpose  fulfilled. 

THE  AUTHOR. 

December,  1905. 


COMMENDATORY 

Oflficially  endorsed  and  recommended  by 
a  specially  appointed  reviewing  committee 
of  the  Board  of  Directors  of  the  California 
Society  of  Certified  Public  Accountants, 
San  Francisco,  Cal.,  1905. 


PRESS  OF  THK 

Frbsno  R^pubIvICAn  Pubi^ishing  Company 

(Printers-Publishers-Bookbinders) 

Frbsno,  Cai^ifornia 


PART   L 


CORPORATE    ORGANIZATION    AND 
MANAGEMENT. 


^  or  THE 

UNIVERSITY 


CHAPTER  I. 

A  Corporation  Defined — Various  Kinds  of  Corporations 
Explained  and  Classified — Who  May  Form  a  Corporation — 
How  Corporations  are  Formed  and  Governed.  Their  Nature, 
Powers,  Privileges  and  Shortcomings — Their  Advantages 
Over  Partnerships — Liberal  Corporation  Laws. 


I.  The  French  aptly  describe  a  co^pp^atipT^  „as  a  ;''5?0Ciete 
anonyme"  or  anonymous  society  for  the  obvi'ous  reasori  that  its' 
name  or  title  in  contradistinction  to' a  firm  Tyamej.genQr^alJy 
conceals  the  identity  of  its  member^,,  a/xd  the  furth'er.  teasSti-, 
that  inasmuch  as  there  is  no  publicity  attending  the  formation 
of  a  corporation  or  the  transfer  of  its  stock,  and  as  its  mem- 
bership is  subject  to  complete  and  continuous  change,  the 
membership  is  practically  unknown  to  anybody.  Webster 
defines  a  corporation  thus :  ]  "A  corporation  is  a  body  politic 
or  corporate,  formed  and  authorized  by  law  to  act  as  an  indi- 
vidual or  single  person ;  in  other  words,  a  corporation  is  an 
artificial  person  created  by  law  and  endowed  with  the  capacity 
of  succession  and  the  further  capacity  of  transacting  business 
as  an  individual."  It  may  also  be  defined  as  a  collective  legal 
entity,  possessing  all  of  the  legal  and  many  of  the  moral  rights 
and  responsibilities  granted  to,  and  imposed  upon,  natural  per- 
sons in  the  transaction  of  business ;  and  while  it  exists,  as  a 
legal  fiction,  independently  of  its  members,  being  without  con- 
sciousness it  is  obviously  without  moral  sensibility  and 
must  derive  its  character  from  the  human  units  that  direct  and 
energize  it;  and  though  these  units  may  at  times  endeavor  to 
shift  the  blame  for  their  misdeeds  on  to  the  shoulders  of  a 
"soulless"  corporation,  they  are  nevertheless  amenable  to 
moral  and  statutory  law  for  all  transgressions  and  "ultra  vires" 
acts  committed  in  its  name — this  is  reasonably  and  necessarily 
so  from  the  very  nature  of  a  corporation,  for  although  we  say 
it  can  sue  and  be  sued,  being  a  mere  legal  abstraction  and  not 
possessed  of  sensory  nerves  or  of  the  passive  power  of  suffer- 
ing, it  is  an  axiom  of  common  sense  that  any  punishment 
meted  out  to  it  must  be  borne  by  its*  physical  membership. 
The  corporation  is  a  development  of  modern  business  neces- 
sity; and  while  its  functions  have  been  often  perverted  and  its 


12  COEPORATION  ACCOUNTING 

privileges  shamefully  abused,  still  it  is,  in  the  main,  one  of  the 
[most  potent  causes  of  our  wonderful  commercial,  financial  and 
^even  scientific  advancement.  It  has  simplified  the  complexity 
of  modern  business  demands,  and  made  possible  the  carrying 
out  of  the  greatest  achievements  of  the  age.  It  is,  as  v^ill  be 
shown  later  on,  the  only  safe,  rational  and  efficacious  means  of 
uniting  capital  for  the  promotion  of  any  business  enterprise. 

Kinds  of  Corporations. 

2.  A  corporation  can  be  either  aggregate  or  sole.  A  cor- 
poration aggregate  consists  of  any  number  above  one,  and  is 
preserved  by  a  succession  of  its  members  indefinitely,  or  for  a 
limited  number  of  years,  as  fixed  by  its  charter. 

3,»  ,A  corporation;  sole  consists  of  one  person  legally  made 
a  body.^olitio.bi-  'rq rJp(irate,  in  order  to  give  him  some  legal 
capacities  >whiQ];i. as, an *in4ividual  he  could  not  have,  especially 
tHe.  figHtV<^£  ^S-ucdessic^n.  Kings,  bishops  and  ecclesiastics  are 
instances  of  this  class 'o!  corporation;  the  property  of  which 
they  may  be  seized  in  the  rights  of  their  subjects  or  parishion- 
ers passing  to  their  successors. 

4.  Properly  speaking  there  are  but  two  classes  of  corpora- 
tions— public  and  private.  Municipal  corporations,  state  uni- 
versities and  all  corporations  operated  solely  in  the  interest  of 
the  public  and  supported  by  public  funds  come  under  the  first 
heading;  all  others  are  private.  Some  make  a  subdivision  of 
private  corporations  which  they  term  ''Quasi-public";  that  is, 
resembling  a  public  corporation  in  a  certain  sense  or  degree ; 
as  for  instance,  railroads,  street  railways,  gas  companies  and 
all  such  public  service  corporations,  and  also  extensive  co- 
operative farming  and  fruit  growing  corporations;  but  inas- 
much as  they  are  capitalized  by  private  individuals  they  are 
private  corporations. 

5.  Private  corporations  are  generally  formed  for  the  pur- 
pose of  carrying  on  business  enterprises,  in  the  interest  and 
for  the  financial  benefit  of  their  members.  These  are  called 
corporations  for  profit.  Others  are  formed  for  religious,  edu- 
cational and  charitable  purposes;  such  as  churches,  schools 
and  orphanages.  These  are  variously  called  theological,  edu- 
cational and  eleemosynary  corporations.  By  incorporating, 
these  institutions  acquire  the  right  to  own  and  hold  real  estate 
and  personal  property,  to  buy,  sell  and  mortgage  the  same 
under  authority  of  the  courts ;  to  accept  donations,  deeds  and 
bequests;  and  to  do  such  other  and  further  things  as  their 
charters  authorize.  Usually  they  have  no  capital  stock,  and 
their  management  is  vested  in  a  board  of  trustees. 


AND    CORPOEATION    LAW  13 

6.  A  close  corporation  is  merely  one  of  very  limited  mem- 
bership, the  stock  being  held  by  a  few  persons  and  not  gener- 
ally traded  in. 

Corporations — How  Formed. 

7.  Corporations  may  be  formed  under  a  general  law  of 
the  state  or  "General  Corporation  Act/'  governing  corpora- 
tions', which  law  becomes  operative  in  their  behalf  as  soon  as 
the  members  of  such  corporations  organize  under  its  pro- 
visions. S  pecial  provisions  govern  the  organization  of  banks, 
insurance  companies,  telegraph  companies,  etc.  Railroad  com- 
panies and  other  public  service  companies  must  obtain  a  fran- 
chise from  every  city  and  county  in  which  they  operate,  and 
must  file  in  each  county  a  copy  of  their  articles  of  incor- 
poration. 

8.  In  private  corporations',  corporate  power,  that  is  to  say, 
the  legal  rights  and  liabilities  of  membership,  can  not  be  forced 
on  members  against  their  will.  It  is  necessary  that  they  ac- 
cept the  charter;  however,  if  they  act  under  it,  the  presump- 
tion is  that  they  accept  it. 

9.  The  laws  of  the  various  states  differ  in  regard  to  cor- 
porations. Further  on  in  this  work  will  be  found  an  epitome, 
of  the  corporation  laws  of  all  the  states,  and  it  might  b^'well 
for  those  who  think  of  organizing  a  stock  company  to  read 
them  carefully.  No  other  work  of  this  kind„  known  to  the 
writer,  embraces  this  feature.  Some  states  offer  exceptional 
advantages  to  corporations,  while  others  offer  obstacles,  and 
a  knowledge  of  these  advantages,  or  obstacles,  as  the  case 
may  be,  may  prove  very  valuable. 

10.  A  corporation  must  have  a  name  by  which  it  shall  be 
known  in  lav/  and  in  its  business  transactions.  This  name 
must  be  adhered  to ;  although  a  corporation  may  be  liable  for 
debts  contracted  under  another  name.  For  instance,  the 
Fresno  Republican  Publishing  Company  is  liable  for  obliga- 
tions incurred  in  the  name  of  onej  of  its  publications — ''The 
Fresno  Morning  Republican." 

10.  (a)  The  necessity  for  using  the  corporate  name  is, 
that  in  its  business  affairs'  it  is  known  to  the  law  as  an  indi- 
vidual. 

11.  The  use  of  the  seal  is  not  as  general  nor  as  necessary 
as  was  formerly  supposed.  It  is  only  in  the  execution  of  legal 
documents  and  on  the  face  of  its  own  stock  and  bonds'  that  it 
is  necessary.    See  paragraph  29  (g). 


14  COEPOEATION  ACCOUNTING 

Advantages  of  Corporations. 

12.  (a)  Unlimited  membership  with  Hmited  agency  of 
directors.  Partnerships  are  necessarily  Hmited  in  membership, 
for  the  reason  that  partners  may  do  all  sorts  of  contrary  things' 
for  which  all  members  of  the  partnership  are  severally  liable; 
and  no  agreement  between  the  partners  can  bind  outsiders. 
The  usual  powers  of  partnership  are  supposed  to  be  vested  in 
each  member,  and  the  common  assumption  is  that  they  are, 
unless  notice  is  given  to  the  contrary;  hence,  a  partner  may 
incur  obligations  while  he  is  insolvent,  that  are  binding  on  the 
other  members — not  so  in  a  corporation.  No  mere  stockholder 
nor  person  other  than  its  manager  or  other  person  thereunto 
duly  authorized,  can  incur  debts  or  obligations  in  the  name  of 
the  corporation.  As  a  further  safeguard,  the  by-laws  of  some 
companies  provide  that  no  agent  (not  even  the  president  or 
manager)  can  obligate  the  company  in  any  sum  exceeding  a 
certain  amount,  sometimes  $ioo,  without  the  previous  approval 
or  subsequent  ratification  of  the  board  of  directors.  The  di- 
rectors themselves  are  agents  of  the  corporation,  deriving  their 
offices  from  the  stockholders  and  their  powers  from  the  by- 
laws of  the  company.  Their  duties  are  defined  and  their  pow- 
ers circumscribed  by  the  regulations  of  the  company,  and  they 
are  liable  to  the  stockholders,  as'  well  as  amenable  to  the  law, 
for  any  excess  of  their  authority.  A  director  can  also  be  re- 
moved from  office  by  a  vote  of  the  stockholders  holding  a  suf- 
ficient number  of  shares  of  the  capital  stock,  at  a  general  meet- 
ing held  for  that  purpose,  after  due  notice  of  the  time  and 
place  and  intention  of  the  holding  of  such  meeting  shall  have 
been  given. 

13.  (b)  In  a  corporation  there  is  a  union  of  capital,  with- 
out a  union  of  service  on  the  part  of  its  members — the  directors 
representing  the  interests  of  all  the  stockholders,  while  the 
stockholders  are  free  to  engage  in  any  other  business.  In 
general  partnerships,  it  is  a  principle  of  law  that  every  partner 
shall  give  his  entire  service  to  the  partnership,  otherwise  he 
has  worked  an  impairment  of  the  partnership  and  is  liable 
therefor;  but  under  the  corporation  dispensation,  neither  time 
nor  service  is*  required  of  any  mere  stockholder.  He  is  repre- 
sented by  the  directors  in  whose  selection  he  has  a  choice  in 
proportion  to  his  holdings,  and  the  directors  being  chosen  by 
a  vote  of  shares  always  represent  the  greatest  interests ;  how- 
ever, in  some  states',  for  instance  California  and  New  Jersey, 
provision  is  made  for  minority  representation  on  the  Board 
by  means  of  cumulative  voting. 

14.  (c)     Better   facilities   for   borrowing   are   afforded   a 


AND    COBPOEATION    LAW  15 

corporation,  since  it  can  raise  money  on  an  issue  of  bonds,  or 
additional  stock,  or  debentures.  It  is  not  an  uncommon  thing 
for  a  company  needing  additional  capital,  and  not  desiring  to 
pledge  its  securties  for  an  issue  of  bonds,  to  create  a  new  issue 
of  preferred  stock,  which  often  finds  a  ready  market  on  account 
of  its  preferential  dividend  features,  thus  relieving  the  strin- 
gency without  creating  any  new  trade  obligations.  Stock- 
holders are  also  permitted  to  invest  in  the  securities  of  their 
corporation  and  stand  in  the  same  relation,  in  this  respect,  as' 
do  other  creditors,  in  case  of  insolvency.  On  the  other  hand 
firms  requiring  more  capital  must  either  borrow  the  money 
or  advance  it  without  security ;  as,  in  case  of  failure,  the  part- 
ners' claims  do  not  hold  until  all  the  creditors'  claims  are  sat- 
isfied. Another  advantage  the  stockholder  has  over  the  part- 
ner in  respect  of  borrowing  is,  that  he  can  borrow  money  on 
his  stock  as  collateral,  whereas  his  interest  in  a  partnership 
is  not  collateral.  Stock  in  a  successful  company  is  a  very  con- 
venient form  of  collateral;  its  use  as  such  not  requiring  the 
examination  of  deeds,  abstracts  or  the  recording  of  instru- 
ments. 

15.  (d)  Neither  death  nor  change  of  members  affects 
the  continuance  of  a  corporation.  The  continuity  of  a  cor- 
poration would  not  be  affected  even  if  all  its  members  should 
die  or  sell  out.  The  stock  would  pass  to  the  heirs  or  assignees' 
and  the  business  need  not  be  disturbed  in  name  nor  otherwise. 
On  the  other  hand,  the  death  of  one  partner  dissolves  a  part- 
nership, and  the  winding  up  of  his  estate  often  causes'  a  use- 
less sacrifice  of  assets,  and  not  infrequently  the  ruination  of 
a  successful  business  enterprise.  Furthermore,  the  admission 
of  a  new  member  necessitates  the  dissolution  of  a  partnership 
and  the  formation  of  a  new  one,  with  all  its  attendant  annoy- 
ances and  publicity.  Again,  a  partner  wishing  to  retire  from 
a  firm  often  has  trouble  in  the  adjustment  and  sale  of  his  in- 
terests ;  and  while  his  retirement  dissolves  the  partnership  it 
does  not  relieve  him  of  partnership  liability  contracted  while 
he  was  a  partner ;  nor  even  after,  provided  he  has  not  taken 
due  and  proper  measures'  to  notify  all  his  firm's  creditors  spe- 
cifically, and  the  public  generally,  by  advertisement,  that  he 
is  no  longer  a  member  of  the  firm.  He  must  not  even  hold 
himself  out,  nor  permit  himself  to  be  held  out  as  a  partner, 
by  the  use  of  signs  or  advertisements  or  other  evidences  of 
proprietary  interest  that  could  influence  anyone  to  extend 
credit  to  the  firm  on  the  strength  of  his  connection  therewith ; 
whereas,  new  shareholders  are  admitted  to  a  corporation  by 
the  sale  or  transfer  to  them  of  stock,  and  they  may  retire  from 
it  any  time  by  merely  selling  their  stock  without  publication 


16  COKPOKATION  ACCOUNTING 

or  notice  of  any  kind.  In  some  states,  as  for  instance  New- 
Jersey,  their  liability  ceases  with  their  membership;'^  while 
in  others,  as  for  instance  California,  their  liability  ceases  for 
debts  contracted  after  they  have  transferred  their  stock,  but 
exists  as  to  debts  previously  contracted,  in  a  certain,  well  de- 
fined ratio.  Of  course  it  must  be  understood  that  it  is  a  well 
settled  principle  of  common  law  and  public  policy,  that  a 
transfer  of  any  property  with  fraudulent  intent  does  not  con- 
stitute a  transfer  in  the  eyes  of  the  law. 

i6.  (e)  The  title  to  property  held  in  partnership  may 
be  affected  by  the  bankruptcy  or  death  of  any  one  of  its  mem- 
bers ;  but  a  corporation  being  a  body  corporate,  the  title  is 
vested  in  it,  and  is  not  affected  by  change  of  membership  or 
death.  If  a  member  of  a  firrn  becomes  insolvent  his  interests 
may  be  attached  and  executed  upon — here  again  the  partner- 
ship is  dissolved  and  in  the  very  nature  of  things  the  other 
partners'  interests  are  injured.  If  a  stockholder  becomes  in- 
solvent, his  stock  alone  can  be  levied  upon  and  sold — the 
property  of  the  corporation  can  not  be  touched — ,  hence  the 
corporation  is  not  affected. 

17.  (f)  Perhaps  the  most  important  and  most  advan- 
tageous feature  of  a  corporation  is  the  limited  liability  of  the 
stockholder  as  compared  wath  the  partner.  In  a  partnership, 
every  partner  is  liable  for  all  of  the  debts  of  the  firm ;  and  as 
every  partner,  generally  speaking,  is  an  unlimited  agent  of  the 
partnership  (even  though  he  have  but  the  smallest  interest 
in  the  business),  the  partner  with  the  smallest  interest  can 
bind  the  other  partners  to  the  extent  of  their  private  fortunes, 
by  contracting  debts  in  the  partnership  name,  giving  notes  or 
otherwise ;  and  per  contra,  the  man  with  the  smallest  interest 
may  find  himself  liable  for  all  of  the  debts  of  his  firm ;  when 
by  extravagance,  mismanagement  or  fraud,  the  other  members 
of  the  firm  have  dissipated  the  assets.  In  a  corporation,  how- 
ever, the  most  he  can  lose,  in  most  states,  is  the  amount  he 
has  invested  or  subscribed.  At  the  very  outside,  it  will  be  an 
equitable  share  of  the  debts ;  and  in  no  case  can  a  stockholder 
endanger  his  private  fortune — the  exact  liability  in  each  state 
is  treated  in  Chapter  XL  of  this  work.  Furthermore,  the 
officers  or  executive  heads  in  a  corporation  are  limited  in  their 
authority  to  bind  the  company  for  extraordinary  debts  or  ob- 
ligations. Even  though  the  officers  should  enter  into  large 
contracts  or  give  notes  in  large  amounts,  their  action  is  not 
binding  on  the  corporation  if  they  are  not  authorized  to  do  so 

*This  is  one  of  the  weak  spots  in  the  New  Jersey  law.  No  just  law 
would  permit  a  man  to  divest  himself  of  his  liabilities  as  he  would  of  his 
garments.    This  is  a  direct  incentive  to  wrong  doing. 


AND    CORPORATION    LAW  17 

by  resolution  of  the  board  of  directors,  or  by  their  governing 
code;  or,  to  put  it  negatively,  if  the  Articles  of  Incorporation 
or  By-Lav^s  expressly  state  that  they  may  not  borrow  money 
or  pledge  the  credit  of  the  company  excepting  by  resolution 
of  the  Board  investing  them  with  authority  to  do  so,  the 
company  shall  not  be  bound  by  their  act.  This  necessarily 
and  properly  puts  the  burden  on  the  creditor  of  knowing 
that  the  corporate  officers  are  acting  within  their  powers; 
hence  he  asks  for  copies  of  by-laws  and  certified  copies  of 
resolutions. 

i8.  (g)  Another  advantage  of  corporations  is,  that  in 
case  of  financial  difficulties  they  can  frequently  save  them- 
selves by  reorganization ;  the  creditors  often  taking  reorgani-  y 
zation  stock  in  lieu  of  their  claims,  thus  saving  the  company 
from  ruin  and  themselves  from  direct  and  immediate  loss. 
Indeed,  many  reorganized  companies  get  a  new  hold  on  life 
and  prosper  exceedingly. 

19.  (h)     Of   minor   though   not  of   insignificant   interest 

is  the  ease  and  exactitude  with  which  adjustments  of  profits,  ^ 
and  capital  interests,  can  be  made  at  time  of  profit  sharing 
periods  or  liquidations,  as  the  case  may  be.  These  divisions 
are  equitable  and  ratable  on  the  basis  of  outstanding  shares. 
There  are  no  complex  partnership  problems  to  be  adjusted; 
and  accountants  and  attorneys  know  that  these  are  rarely  ad- 
justed to  the  satisfaction  of  everybody.  It  is'  simply  a  case 
of  taking  the  whole  number,  dividing  it  by  the  number  of 
shares,  then  taking  the  quotient  as  the  unit  of  value  and  mul- 
tiplying it  in  turn  by  the  shares  of  each. 

20.  (i)  In  case  of  suit,  a  corporation  can  complain  and 
defend  itself  in  its  own  name ;  but,'  in  a  partnership  all  the 
partner'  names  must  be  joined  in  the  action. 

21.  (j)  Lastly,  a  corporation  has  the  quality  of  perma- 
nency, the  virtue  of  minimized  liability,  and  the  potential 
strength  of  numbers  unified  in  capital  and  purpose ;  while  the 
partnership  is  a  creature  of  change  and  circumstance,  a  house 
built  upon  shifting  sands,  a  hydra-headed  organization  lack- 
ing in  permanency,  but  beset  by  the  sin  of  unlimited  liability. 

/"He  does  possession  keep,  \ 

I  And  is  too  wise  to  hazard  partnership." — Dry  den.  / 

The  Other  Side. 

21.  (b)  It  must  be  admitted,  however,  that  there  is  an- 
other side  to  this  picture  and  that  it  has  its  dark  shadings  too. 
There  are  some  corporations  that  dishonor  the  laws  that  cre- 
ated them  and  disgrace  the  states  that  tolerate  them.     There 


18  COEPOEATION  ACCOUNTING 

are  men  in  control  of  large  corporations  who  use  the  minority 
stockholders  as  they  would  a  door  mat.  They  take  advantage 
of  legal  technicalities  to  deprive  the  small  stockholders  of  their 
equitable  share  in  the  profits.  They  adjust  their  salaries  to 
the  profits  so  that  there  is  nothing  left  for  dividends.  Being 
in  control,  they  elect  themselves,  fix  their  own  salaries,  (maybe 
assess  the  others  out)  and  the  small  stockholder  finding  him- 
self outwitted,  outvoted  and  outraged,  has  only  one  option, 
and  that  is  to  sell  out;  and,  generally,  he  has  to  sell  for  what 
the  "masters"  wish  to  pay — it  is  a  case  of  the  sharks  eating 
up  the  little  fishes.  The  moral  of  this  is  that  the  small  capital- 
ist has  no  business  investing  his  savings  in  those  large  high- 
water  mark  corporations.  Hie  is  simply  a  cork  on  the  surface 
of  the  water,  tossed  about  with  the  heaving  and  receding  of 
every  wave,  voiceless,  helpless,  dependent.  Then  there  is  the 
tendency  in  recent  corporation  legislation  in  some  states  to 
eliminate  as  far  as  possible  the  element  of  individual  liability. 
While  this  has  some  good  points  in  it,  the  principal  in  itself 
is'  dangerous.  When  men  gamble  for  the  profits  it  is  only 
fair  that  they  should  gamble  for  the  losses.  The  evident  in- 
tention of  the  law  seems  to  be  fair,  but  the  advantage  taken 
of  it  is,  imfortunately,  not  always  fair.  It  is  the  purpose  and 
function  of  law  to  protect  not  only  the  weak  against  the  strong, 
but  also  against  themselves.  The  capital  of  a  company  is 
supposed  to  be  a  trust  fund  maintained  intact  for  the  protec- 
tion of  its  creditors.  It  is  supposed  to  be  the  sole  basis  of  a 
company's  credit;  but  when  that  capital  is  watered  and  then 
expanded  with  hot  air,  the  basis  of  credit  becomes  almost  "as 
baseless  as  the  fabric  of  a  dream."  It  should  be  considered 
the  dut}^  of  every  state  limiting  the  liability  of  stockholders, 
to  see  to  it  that  the  capital  stock  of  every  corporation  is  repre- 
sented and  sustained  by  actual  assets  equivalent  in  money 
value  to  the  par  value  of  the  stock  for  which  they  were  ex- 
changed, and  that,  where  this  is  not  so,  the  shareholders  hold- 
ing stock  out  of  proportion  to  the  real  value  of  the  capital 
which  they  contributed  be  compelled  to  transfer  to  the  com- 
pany every  share  of  stock  to  which  they  are  not  justly  en- 
titled. The  state  charters  the  corporations  and  should  exer- 
cise a  reasonable  control  or  supervision  over  them.  It  should 
at  least  prevent  them  from  prostituting  their  charters  by  the 
perpretation  of  fraud  upon  the  public;  and  it  can  do  this  in 
no  better  way  than  by  employing  skilled  public  accountants 
to  audit  and  investigate  at  its  formation,  and  annually  there- 
after, every  corporation  that  offers  its  stock  and  bonds  to  the 
public.  No  honest  corporation  can  object  to  this,  and  it 
would  go  a  long  way  toward  inspiring  pubilc  confidence  in 


(    UNIVERSITY   1 

AND    CORPORATION    JjAW'^^'imSSSSS^^  19 

them,  and  establishing  a  feeling  of  security  among  creditors 
generally.  It  is  to  be  hoped  that  this  condition  will  be  brought 
about  before  long,  because  inasmuch  as  a  corporation  has  "no 
back  to  kick  and  no  soul  to  damn,"  it  can  not  be  influenced  by 
such  extrinsic  measures  as  physical  fears  or  moral  terrors, 
therefore  its  mystic  entity  must  be  awed  and  controlled  by 
the  mystic  majesty  of  the  law.  The  individuals  whose 
thoughts,  actions,  emotions  and  ambitions  are  crystalized  in 
the  corporation  will  then  be  obliged  to  give  their  creature  a 
fair  deal.  Other  objections  may  be  urged  against  the  cor- 
porate form  of  association,  but  none  of  these  apply  to  the 
average  business  corporation,  and  notwithstanding  these  ob- 
jections the  corporate  form  is  the  best.  In  measuring  the 
value  of  a  new  system,  we  must  carefully  weigh  its  advan- 
tages and  as  carefully  consider  its  faults  in  relation  to,  and 
comparison  with,  the  older  system;  and  if  the  balance  of  ad- 
vantage attaches  to  the  new,  it  is  the  best;  and  I  think  the 
balance  of  advantage  attaches  to  corporations'  as  compared 
with  partnerships. 

Powers  of  Corporations. 

22.  A  corporation  being  a  creature  of  the  law  has  only 
such  powers  as  the  law  confers  upon  it.  It  has  the  power  to : — 

1.  Of  succession  by  its  corporate  name  indefinitely  or  for 
the  period  limited  by  its  charter. 

2.  To  sue  and  to  be  sued  in  any  court  of  law  or  equity. 

3.  To  make  and  use  a  common  seal  and  alter  the  same  at 
pleasure. 

4.  To  purchase,  hold  and  convey  such  real  and  personal 
estate  as  the  purposes  of  the  corporation  may  require,  or  for 
other  purposes,  in  accordance  with  the  laws  of  the  state  under 
which  it  is  organized — if  a  National  Bank,  under  the  National 
Banking  laws'. 

5.  To  appoint  such  subordinate  officers  or  agents  as  the 
business  of  the  corporation  may  require,  and  to  allow  them 
suitable  compensation. 

6.  To  make  by-laws,  not  inconsistent  with  any  existing 
laws'  of  the  state  or  of  the  United  States,  for  the  management 
of  its  property,  the  regulation  of  its  affairs,  and  the  transfer 
of  its  stock. 

7.  To  admit  stockholders  or  members,  and  to  sell  their 
stock  or  shares  for  the  payment  of  assessments  or  install- 
ments',as  provided  by  law. 

Note — For  information  about  incorporating  a  partnership,  see  "Con- 
version of  Partnerships,"  Chapter  XXIX,  in  the  practical  accounting  part 
of  this  work. 


20  COEPORATION  ACCOUNTING 

8.  To  enter  into  any  legitimate  obligations  or  contracts 
essential  to  the  transaction  of  its  ordinary  affairs,  or  for  the 
purposes  of  the  corporation. 

9.  To  wind  up  and  dissolve  itself,  or  provide  for  the  wind- 
ing up  of  its  aft'airs  at  time  of  dissolution,  in  accordance  with 
law. 

How  a  Corporation  is  Formed. 

23.  A  corporation  is  formed  by  the  voluntary  association 
of  a  certain  number  of  persons.*  The  minimum  number  de- 
pends upon  the  regulation  of  the  state  law  under  which  the 
corporation  is  to  be  organized.  In  California  the  minimum 
is  3,  in  New  Jersey  3,  and  in  Delaware  3;  while  the  revised 
statutes  of  Arizona  provide  that,  "Any  number  of  persons  may 
associate  themselves  together  and  become  incorporated." 

24.  It  is  very  important,  however,  for  the  incorporators' 
to  consider  the  defects  as  well  as  the  advantages  of  the  state 
laws  under  which  they  propose  to  organize.  The  fairest  flower 
does  not  always  hold  the  sweetest  perfume,  and  the  fairest 
looking  code  of  corporation  laws  is  not  necessarily  the  best. 
In  measuring  the  value  of  the  liberal  privileges  granted  we 
must  not  overlook  the  price  we  pay  for  these  concessions ; 
hence  we  should  familiarize  ourselves  with  the  system  of  fees 
and  taxes  imposed  upon  corporations ;  how  corporation  prop- 
erty and  franchises  are  taxed ;  the  rate  of  taxation ;  the  cost 
of  filing  instruments,  and  so  forth ;  also  the  kinds  of  stock  that 
may  be  issued,  if  mergers  may  be  formed,  if  stocks  and  bonds 
are  interconvertible — if  so,  how  and  under  what  conditions. 

Liberal  Corporation  Laws. 

25.  Herewith  is  given  a  summary  of  the  principal  features 
of  the  so-called  "liberal  corporation  laws"  of  New  Jersey, 
Delaware  and  Arizona;  as  well  as  of  California. 

*'For  "dummy  incorporators"  see  paragraph  203  (a). 


CHAPTER  II.  ^ 

A  Comprehensive  Review  of  the  Salient  Features  of  the 
General  Corporation  Laws  of  New  Jersey,  With  Numerous 
Annotations  and  Court  Decisions. 


26.  New  Jersey  has  of  late  years  been  before  the  public 
as  the  nursery,  or  hatchery,  of  corporations,  trusts,  mergers 
and  stupendous  combinations  of  organized  capital.  It  has 
been  damned  and  praised  and  yet  not  half  understood  by 
either  its  enemies  or  its  friends.  Quoting  from  Horace  L. 
Wilgus,  Professor  of  Law  in  the  University  of  Michigan: — 
''This  (New  Jersey)  is  the  only  state  that  seems  yet  to  have 
consistently  and  adequately  worked  out  a  corporate  policy 
that  compares  at  all  with  the  care  that  has  been  given  to  the 
subject  in  England ;  the  New  Jersey  policy,  however,  is  much 
more  liberal  than  the  English ;  and  whatever  one  may  think 
of  the  policy,  one  must  commend  the  manner  in  which  it  has 
been  formulated,  amended  and  applied  through  the  hands  of 
experts,  continually  following  a  definite  plan  and  policy,  in- 
stead of  being  a  mere  hotch-potch  of  inconsistent,  uncon- 
nected provisions,  often  without  plan  and  frequently  with  as 
little  sense."     December  1902. 

Minimum  Number  and  Capital. 

27.  Three  or  more  persons,  none  of  whom  are  required 
to  be  citizens  of  New  Jersey,  may  by  voluntary  association 
and  compliance  with  the  provisions  of  the  General  Corporation 
Act,  form  themselves  into  a  business  corporation  for  the 
transaction  of  any  lawful  business. 

Minimum  Capital. 

28.  No  corporation  may  be  formed  with  a  smaller  capital 
than  $2000.  The  Articles  must  state  the  amount  with  which 
it  shall  commence  business — in  no  case  less  than  $1000. 

General  Powers  Granted. 

29.  (a)  The  power  of  succession  by  its  corporate  name, 
either  perpetually  or  for  a  limited  period,  as  stated  in  its 
charter. 


■22  CORPORATION  ACCOUNTING 

(b)  The  power  to  sue  and  be  sued  in  any  court  of 
law  or  equity. 

(c)  The  power  to  acquire,  by  purchase  or  otherwise, 
real  estate,  and  to  hold,  convey  and  mortgage  same.  (It  has 
been  held  by  the  New  Jersey  courts'  that  only  the  state  can 
question  the  right  of  a  corporation  to  hold  real  estate  in  ex- 
cess of  its  requirements  and  further,  that  even  a  limited  period 
corporation  can  hold  title  to  land  in  fee  simple.) 

(d)  The  power  to  appoint  officers  and  agents  neces- 
sary to  the  transaction  of  its  business,  and  to  pay  them  suit- 
ably for  their  services. 

(e)  The  power  to  make  by-laws,  fixing  and  altering 
the  number  of  its  directors,  the  regulation  of  its  affairs,  trans- 
fer of  its  stock,  etc. 

(f)  The  power  to  wind  up  and  dissolve  itself,  or  be 
w^ound  up  and  dissolved  in  the  manner  provided  by  the  Gen- 
eral Corporation  Act. 

(g)  The  power  to  make  and  use  a  common  seal  and 
alter  the  same.  (The  use  of  the  seal  is  only  necessary  on 
stocks,  bonds,  deeds,  mortgages,  resolutions  and  the  like ;  and 
the  simple  impress  of  the  seal  on  the  face  of  the  paper,  with- 
out any  super  imposition,  is  sufficient;  the  important  thing 
being  that  the  proper  corporate  seal  is  used  and  that  it  is 
authoritatively  affixed.) 

Bonds  and  Mortgages. 

30.  It  is  not  necessary  to  obtain  the  consent  of  the  stock- 
holders to  create  a  mortgage;  the  power  to  do  so  is  vested 
in  the  directors,  and  it  is  only  as  a  question  of  domestic  policy 
that  the  stockholders'  consent  is,  or  may  be  asked. 

Further,  the  Hon.  James'  B.  Dill,  the  foremost  corporation 
lawyer  in  New  Jersey  says :  "There  is  no  statutory  limitation 
on  the  power  of  a  corporation  organized  under  this  Act  to 
issue  bonds  or  debentures,  whether  secured  by  mortgage  or 
otherwise."  * 

*Too  much  power  granted  to  a  board  of  directors  is  dangerous.  The 
directors  are  the  agents  of  the  stockholders  and  in  a  matter  of  this  kind 
involving  the  pledge  of  the  company's  assets,  they  should  be  required  to 
go  back  to  their  principals  (the  stockholders)  for  specific  authority. 
Further  it  appears  unwise  to  fix  no  limit  on  the  issuance  of  bonds  and 
debentures,  but  to  permit  the  issue  of  all  that  the  public  will  consume. 
•Such  powers  are  a  strong  incentive  to  reckless  speculation  and  frequently 
result  in  disaster.    A  measure  of  conservatism  is  best. 


AND    COEPOEATION    LAW  25; 

Additional  Powers. 

31.  Section  2  of  the  General  Corporation  Act  reads  as  fol- 
lows : 

In  addition  to  the  powers  enumerated  in  the  first  section 
of  this  Act  and  the  powers  specified  in  its  charter,  or  in  the 
Act  or  Certificate  under  which  it  was  incorporated,  every  cor- 
poration, its  officers,  directors  and  stockholders,  shall  possess 
and  exercise  all  the  powers'  and  privileges  contained  in  this 
Act,  so  far  as  the  same  are  necessary  or  convenient  to  the  at- 
tainment of  the  objects  of  incorporation;  and  shall  be  gov- 
erned by  the  provisions  and  be  subject  to  the  restrictions  and 
liabilities  in  this  Act  contained,  so  far  as  the  same  are  appro- 
priate to  and  not  inconsistent  with  such  charter  or  the  Act 
under  which  such  corporation  was  formed;  and  no  corpora- 
tion shall  possess  or  exercise  any  other  corporate  powers  ex- 
cept such  incidental  powers  as  shall  be  necessary  to  the  exer- 
cise of  the  powers  so  given." 

32.  This'  is  considered  a  very  important  section.  It  sug- 
gests at  once  the,  twofold  source  from  which  a  corporation 
derives  its  powers — the  Corporation  Act  and  the  Articles  of 
Incorporation.  This  does  not  mean,  of  course,  that  the  Ar- 
ticles of  Incorporation  can  contemplate  powers  beyond  the 
intention  or  purposes  of  the  Act,  but  it  does  mean  that  it  can 
make  effective  and  express — all  the  powers  specified  and  im- 
plied by  the  creative  or  enabling  act ;  and  to  quote  again  from 
Mr.  Dill :  "Corporations  are  now  authorized  to  insert  in  their 
certificates  of  incorporation  provisions  "creating  and  defining 
the  powers  of  the  corporation";  thus,  the  corporate  powers 
can  be  enlarged  and  amplified  so  as  to  include  all  implied, 
incidental  and  necessary  powers  to  the  proper  execution  and 
attainment  of  the  corporation  purposes';  as  long  as  such  dif- 
fuse powers  remain  consistent  with  the  Act ;  and  such  powers 
as  wisdom  and  policy  might  limit  or  restrict  can  also  be 
abridged  by  definition;  for  example,  the  certificate  may  pro- 
vide for  two  or  more  kinds  of  stock,  for  cumulative  voting, 
for  the  power  to  elect  directors  on  one  class  of  stock  exclu- 
sively (that  is*  to  say,  where  there  are  two  kinds  of  stock, 
common  and  preferred,  the  right  may  be  granted  to  the  holders 
of  either  class  of  stock  to  elect  all  the  directors),*  may  fix  the 
least  number  of  shares  a  director  shall  own,  may  deprive 
stockholders  of  the  privilege  of  examining  books,  etc.  It  ap- 
pears that  this  provision  is  intended  to  prevent  one  who  is  a 
stockholder  for  ulterior  purposes,  from  carrying  out  his  pur- 
pose, say  of  exposing  the  condition  of  afifairs  of  the  company 

*See  foot  note  to  paragraph  48. 


:24  CORPORATION  ACCOUNTING 

to  a  rival  company  in  which  he  may  be  interested;  and  per 
contra,  all  these  powers  may  be  limited  or  negatived ;  hence  it 
will  be  seen  that  the  drafting  of  the  Certificate  or  Articles  of 
Incorporation  is  a  matter  of  great  importance  requiring  skill 
and  care,  and  an  expert  knowledge  of  all  of  the  potential  pow- 
ers of  the  Corporation  Act ;  and  further,  that  whilst  the  Act  is 
the  preponent  power,  it  is  not  mandatory  as  regards  all  the 
granted  powers  and  privileges;  and  that  beyond  the  general 
powers'  and  restraints,  the  subordinate  authority  of  the  Cer- 
tificate binds  and  controls  Again  quoting  Mr.  Dill:  *'Care 
should  be  taken  that  the  objects  and  purposes  of  the  Company 
are  stated  in  the  fullest  and  clearest  manner  possible,  because 
the  Company  can  not  undertake  any  business  not  authorized 
by  its  charter,  and  not  even  the  fullest  sanction  given  by  the 
shareholders'  will  make  valid  an  act  which  is  outside  of  the 
company.  Directors  undertaking  any  such  business  may  be- 
come personally  liable  for  loss,  and  great  inconvenience  fol- 
lows from  companies  having  too  limited  powers.  It  is  often 
questioned  how  far  it  is  necessary  to  detail  in  extenso  in  the 
Certificate  of  incorporation  the  powers  of  the  company.  The 
ans"wer  is  plain.  The  balance  of  disadvantage  decidedly  at- 
taches to  too  narrowly  defined  objects,"  and  again  Mr.  Dill 
in  his  able  comments  on  section  2  "Additional  Powers,"  says : 
''This  provision  may  also  be  construed  as  meaning  that 
whereas  incorporators  are  enabled  to  create  and  define  the 
powers  which  the  corporation  shall  possess',  in  addition  to 
those  given  by  section  I,  that  the  certificate  of  incorporation 
shall  then  become  the  measure  of  the  company's  powers,  and 
that  powers  not  expressly  or  impliedly  given  by  it  are  ex- 
cluded." 

By-Laws. 

33.  The  corporate  existence  of  a  corporation  begins  with 
the  filing  of  the  Certificate  in  the  office  of  the  County  Clerk 
of  the  County  in  New  Jersey  in  which  the  principal  office  shall 
be  established  and  a  certified  copy  in  the  office  of  the  Secre- 
tary of  State ;  but  the  organization  is  only  complete  when  the 

■  officers  shall  have  been  elected  and  a  code  of  by-laws  adopted. 

Provision  of  By-Laws. 

34.  The  by-laws  shall  provide  for  the  number  of  directors, 
the  management  of  the  company's  property  and  the  govern- 
ment of  its  affairs,  the  term  and  place  of  the  annual  election, 
the  classification  of  directors  (if  there  is  to  be  more  than  one 
class"  authorized  by  the  Certificate)  the  manner  of  electing 
officers  and  their  duties,  the  nature  and  amount  of  the  treas- 


AND    CORPOEATION    LAW  25 

urer's  bond,  the  filling  of  vacancies  among  officers  and  direc- 
tors, the  manner  of  calling  and  conducting  meetings,  the 
qualification  of  voters,  the  number  necessary  to  constitute  a 
quorum  of  stockholders,  the  manner  of  stock  transfers,  the 
qualification  of  directors,  the  establishment  of  an  office  outside 
the  state,  the  keeping  of  books  out  of  the  state,  the  fixing  of 
dividend  periods  and  the  fixing  of  amount  of  profits  to  be  re- 
served as  working  capital. 

35.  Briefly  discussing  these  provisions  in  seriatum  order, 
it  may  be  stated,  by  way  of  introduction,  that  the  making  of 
by-laws  is  the  prerogative  of  the  stockholders',  and  though  that 
power  may  be  granted  to  the  directors  by  the  Certificate  of 
incorporation,  the  by-laws  may  be  subsequently  repealed  or 
amended  by  the  stockholders.  The  by-laws  fix  the  number  of 
directors — in  no  case  less  than  three — and  may  provide  for 
changing  the  number.  They  shall  also  become  the  governing 
code  of  laws  for  the  regulation  of  all  the  internal  affairs  of 
the  company,  and  they  may  provide  a  penalty  not  to  exceed 
$20  for  any  infraction. 

36.  An  annual  election  must  be  held  at  the  registered 
office  of  the  company  in  New  Jersey.  Inasmuch  as  the  law 
requires  that  every  New  Jersey  corporation  must  maintain  a 
principal  office  in  New  Jersey,  where  a  sign  must  be  displayed 
and  a  resident  agent  remain,  on  whom  process  can  be  served 
in  the  name  of  the  corporation,  it  is  customary  for  all  corpora- 
tions organized  in  New  Jersey,  but  doing  business  elsewhere, 
to  name  some  Trust  Company  in  their  Certificate  as  their 
agent,  and  its  office  as  their  principal  office.  These  Trust 
Companies  maintain  a  clerical  force  for  the  purpose  of  writing 
up  the  stock  and  transfer  books,  acting  as  transfer  agents  and 
attending  to  the  filing  of  all  reports  and  the  transaction  of  all 
legal  business  generally.  The  directors  chosen  must  be  stock- 
holders, and  to  them  is  entrusted  the  management  of  the  cor- 
poration. The  usual  term  of  office  is  for  one  year,  but  different 
classes  of  directors  may  be  elected  for  different  periods  of 
time,  varying  from  one  to  five  years';  the  term  of  some  of  one 
class  must  expire  each  year  and  one  director  must  be  a  resi- 
dent of  New  Jersey. 

Election. 

37.  Elections  shall  be  by  ballot  unless  otherwise  expressly 
provided  in  the  charter.  A  majority  in  interest  shall  consti- 
tute a  quorum  and  these  may  be  represented  either  in  person 
or  by  proxy.  Stock  transferred  within  twenty  days  preceding 
election  is  not  entitled  to  vote.  Provision  may  be  made  for 
cumulative  voting  so  that  every  stockholder  may  have  as  many 


26  COEPORATION  ACCOUNTING 

votes  as  he  has  shares  multiplied  by  all  the  directors  to  be 
chosen;  these  he  may  concentrate  on  one,  or  distribute  equally 
among  all,  or  vote  them  in  any  other  way  he  pleases.  A  can- 
didate for  director  can  not  act  as  judge,  clerk  or  inspector. 
The  books  of  the  corporation  shall  be  the  only  evidence  of  a 
stockholder's  right  to  vote,  and  stock  belonging  to  the  com- 
pany can  not  be  voted. 

37.  (a)  The  directors  shall  cause  the  secretary  or  other 
officer  to  make  out  an  alphabetical  list  of  stockholders  10  days 
before  every  election;  which  list  shall  be  open  to  the  inspec- 
tion of  every  stockholder  at  the  principal  office  for  these  ten 
days,  giving  the  address  of  each  stockholder  and  the  number 
of  his  shares.  The  intent  and  purpose  of  this  provision  is, 
according  to  a  Supreme  Court  opinion,  to  give  every  stock- 
holder a  knowledge  of  his  fellow-stockholders  and  an  oppor- 
tunity to  consult  by  mail  or  in  person  in  regard  to  the  coming 
election  and  in  a  measure  rescue  the  election  from  the  control 
of  an  unworthy  board;  however,  the  same  Court  has  decided 
that  this  provision  is  merely  directory  and  that  failure  to  make 
such  list  will  not  invalidate  an  election;  but  then  the  stock- 
holders have  remedial  measures  for  the  removal  of  dishonest 
or  menacingly  incompetent  directors.  Creative  power  implies 
annihilative  power. 

Officers. 

38.  Every  corporation  must  have  a  president,  secretary 
and  treasurer.  The  president  must  be  a  director;  but  the  sec- 
retary and  treasurer  need  not  be  directors.  The  secretary 
must  take  an  oath,  of  office  binding  himself  to  the  faithful 
discharge  of  his  duties ;  and  the  treasurer  must  give  bond  with 
such  surety  and  in  such  amount  as  the  by-laws  shall  fix  and 
determine. 

39.  Section  15.  Any  vacancy  occurring  among  the  direc- 
tors, or  in  the  office  of  president,  secretary  or  treasurer  *  *  * 
shall  be  filled  in  the  manner  provided  for  in  the  by-laws;  in 
the  absence  of  such  provision  vacancies  shall  be  filled  by  the 
board  of  directors. 

Stockholders'  Meeting. 

40.  Section  16.  The  first  meeting  of  every  corporation 
shall  be  called  by  a  notice,  signed  by  a  majority  of  the  incor- 
porators, designating  the  time,  place  and  purpose  of  the  meet- 
ing, which  notice  shall  be  published  at  least  two  weeks  before 
the  meeting  in  some  newspaper  of  the  county  where  the  cor- 
poration is  established;  or  said  first  meeting  may  be  called 


AND    CORPOEATION    LAW  27 

without  publication  if  two  days'  notice  be  personally  served  on 
all  the  incorporators ;  or  if  all  the  incorporators  shall  in  writ- 
ing waive  notice  and  fix  a  time  and  place  of  meeting  no  notice 
or  publication  shall  be  required.  *  *  * 

40.  (a).  Stockholders'  meetings  must  be  held  within  the 
state  at  the  registered  office  of  the  Company,  but  stockholders 
need  not  be  present  in  person  ;*  and  directors'  meetings  may 
be  held  outside  the  state.  All  the  stock  and  transfer  books 
must  be  kept  at  the  New  Jersey  office  and  the  transfer  books 
shall  be  open  to  all  stockholders.  To  be  entitled  to  vote  one 
must  be  a  stockholder  of  record ;  that  is  to  say,  ownership  of 
stock  will  not  entitle  any  one  to  a  vote  unless  the  transfer  to 
him  is  recorded  on  the  transfer  books  of  the  company;  and  it 
has  been  held  that  a  subscriber  for  stock  is  a  stockholder,  and 
as  such  is'  entitled  to  vote  even  though  he  has  not  received 
his  certificate.  Any  meeting  requiring  notice,  may  be  held 
without  such  notice  or  lapse  of  time  providing  all  of  the  stock- 
holders shall  in  writing  waive  such  notice. 

Transfers. 

41.  Transfers  shall  be  made  in  the  manner  provided  in  the 
by-laws.  All  stock  is  regarded  as  personal  property.  When 
transfer  is  not  absolute  but  made  as  collateral  security,  it  is  to 
be  noted  on  the  transfer  book.  (This  is  a  good  provision  viewed 
from  any  standpoint.) 

Conducting  Foreign  Business. 

42.  Any  corporation  of  this  state  may  conduct  business  in 
other  states  or  in  foreign  countries ;  and  may  have  one  or  more 
offices  out  of  this  state ;  and  may  hold,  purchase,  mortgage 
and  convey  real  and  personal  property  out  of  this  state ;  ''pro- 
vided, such  powers  are  included  within  the  objects  set  forth 
in  its  certificate  of  incorporation."  The  books,  other  than  the 
stock  and  transfer  books,  may  be  kept  outside  the  state ;  but 
the  Supreme  and  Chancery  Courts  may  order  all  books  for 
cause,  to  be  brought  into  the  state  and  kept  in  it  for  a  desig- 
nated time. 

43.  To  quote  from  a  court  decision  bearing  upon  the 
above  paragraph :  "The  corporation  exists  by  force  of  the  law 
that  created  it,  and  where  that  law  ceases  to  exist  and  is  not 
obligatory,  the  corporation  can  have  no  existence."  In  other 
words,  a  corporation  is  foreign  outside  of  the  state  of  its  origin,. 

*The  wholesale  giving  of  proxies  in  this  manner,  vests  the  entire 
control  in  the  hands  of  a  few  and  practically  disfranchises  all  the  rest. 
Stockholders  should,  if  possible,  attend  meetings. 


28  COEPORATION  ACCOUNTING 

and  is  subject  in  any  other  state  to  the  laws  affecting  and  reg- 
ulating ''Foreign  Corporations,"  hence  it  has  been  held  by  the 
United  States  Supreme  Court  in  the  matter  of  a  certain  cor- 
poration chartered  in  Colorado  for  the  purpose  of  carrying  on 
part  of  its  operations  in  California  that,  "the  stockholders 
were  liable  to  creditors  according  to  the  provisions  of  the  Cali- 
fornia Statute." 

Dividends. 

44.  Dividends  may  be  paid  only  out  of  net  profits  earned 
by  the  company.  Suitable  penalties  are  provided  for  the  board 
of  directors  or  any  number  of  them  who  shall  permit  the  capi- 
tal to  be  impaired  or  distributed  or  in  any  manner  reduced, 
without  first  having  obtained  permission  to  decrease  the  capi- 
tal stock.  The  courts  have  held  that  corporations  may  be 
compelled  to  declare  dividends  out  of  unused  profits  where 
corporations  improperly  refuse  to  do  so;  also  that  a  declared 
dividend  is  a  debt  that  can  be  collected  at  law.  Dividends  on 
preferred  stock  may  be  made  cumulative,  but  their  payment 
is  of  course  contingent  on  their  being  earned ;  and  in  case  they 
are  not  earned  and  the  company  fails,  the  holder  of  cumulative 
preferred  stock  has  no  claim  on  the  assets  for  accumulated 
dividends. 

Fixing  Reserve. 

45.  It  appears  from  Court  decisions,  that  the  by-laws'  may 
authorize  the  directors  to  fix  the  reserve  of  profits  for  work- 
ing capital.*  Although  directors'  powers  are  delegatory  they 
may  delegate  those  powers  to  others,  hence  we  find  in  many 
corporations  an  Executive  Committee  possessing  and  exer- 
cising the  functions  of  the  Board  of  Directors'. 

Issuing  Stock. 

47.  The  amount  of  the  issue  and  the  kinds  of  stock  to  be 
issued  is  to  be  stated  in  the  certificate.  Stock  may  be  issued 
for  money  or  property.  When  issued  for  money,  the  amount 
must  be  equal  to  the  par  of  the  stock ;  the  same  applies  when 
issued  for  property,  but,  "the  judgment  of  the  directors  as  to 

*This  is  a  privilege  of  doubtful  value.  In  the  hands  of  an  honest 
board  it  makes  for  the  strength  and  solidity  of  a  company.  In  the  hands 
of  a  venal  board  it  may  be  exercised  to  withhold  dividends,  depreciate 
the  stock  and  freeze  out  certain  stockholders. 


AND    COBPOEATION    LAW  29 

the  value  of  the  property  purchased  shall  be  conclusive,"^  (pre- 
suming of  course  that  the  trade  is  not  fraudulent),  the  courts 
having  held  that  an  honest  mistake  does  not  invalidate  the 
transaction.  Only  certain  kinds  of  corporations'  can  issue 
stock  for  labor  or  services. 

Kinds  of  Stock. 

48.  There  does  not  appear  to  be  any  limit  as  to  the  va- 
rious kinds  of  stock  that  may  be  issued  under  proper  certificate 
authority;*  such  as  preferred,  cumulative  preferred,  guaran- 
teed, non-voting-profit-sharing,  deferred,  founders'  stock,  and 
so  on;  but  the  total  amount  of  preferred  stock,  "shall  not  at 
any  time  exceed  two-thirds  of  the  paid  up  capital  stock." 

49.  Preferred  stock  may  be  preferred  both  as  to  dividends 
and  capital;  that  is,  it  may  have  a  preference  in  sharing  the 
profits  and  also  in  the  liquidation  of  the  capital  liabilities.  It 
may  also  be  made  subject  to  redemption,  under  certain  con- 
ditions', or  may  be  converted  into  bonds  or  common  stock  un- 
der other  conditions.  It  should  be  well  understood  that  no 
preference  of  any  kind  can  make  a  stockholder  a  creditor  of 
the  company.  Of  course  a  stockholder  may  also  be  a  bond 
holder,  and  as  such  bondholder  has  the  same  rights  as  other 
like  creditors,  but  this  will  be  treated  more  in  extenso  in  an- 
other chapter  under  "Bonds."  Bonds  may  also  be  converted 
into  common  stock. 

50.  Non-voting-profit-sharing  stock  may  be  issued  where 
it  is  desired  to  give  employes  or  others  a  share  in  the  profits 
without  any  voice  in  the  management. 

Liability  of  Stockholders. 

51.  A  stockholder's  liability  is  single  and  absolute.  He  is 
liable  in  the  amount  of  the  par  value  of  his  subscription  and 

iThis  is  the  most  vicious  provision  in  all  the  New  Jersey  law.  The 
promoters  of  a  company  are  usually  its  first  board  of  directors  and  they 
■often  unload  on  to  the  new  company  property  which  they  own,  or  have 
acquired  for  the  purpose,  at  anywhere  from  twice  its  value  upward,  their 
judgment  being  easily  warped  by  their  interests.  By  clever  manipula- 
tion and  advertising,  they  interest  outside  capital,  get  the  enterprise 
going,  then  quietly  unload  their  stock  at,  or  near,  par  and  multiply  their 
investment,  and  when  they  have  broken  the  stock  they  may  buy  it  back 
at  bear  prices,  and  still  retain  control  after  having  recouped  their  orig- 
inal investment.  This  is  one  form  of  "frenzied  finance"  made  possible  by 
the  "conclusive  judgment"  of  the  directors  as  to  property  values. 

*When  more  than  one  kind  of  stock  is  issued  the  control  should  be 
vested  in  the  common  stock  as  that  is  frequently  the  only  show  it  has 
to  get  dividends.  Purchasers  of  common  stock  should  be  sure  that  the 
■control  does  not  vest  in  the  preferred  stock. 


30  COEPOEATION  ACCOUNTING 

no  more.  Once  he  has  paid  for  his  stock  his  Habihty  ceases, 
and  creditors  must  look  to  the  company's  assets  and  not  to 
the  stockholder's  solvency  or  ability,  in  case  of  company  failure 
— thus  the  stockholder  always  knows  the  limit  of  his  risk  and 
jeopardizes  no  more. 

52.  It  has  been  held  by  the  courts  that  a  stock  subscrip- 
tion is  a  contract,  wherein  the  stockholder  agrees  to  buy  and 
pay  for  the  stock;  and  the  original  subscriber  to  stock  is  not 
relieved  from  liability  to  pay  therefor  by  mere  transfer. 

Assessments. 

53.  The  directors  may  from  time  to  time  levy  assessments 
to  an  amount  not  exceeding  the  par  value  of  the  stock.  Due 
notice  of  such  must  be  given  either  personally,  by  mail,  or  by 
publication.  In  case  of  failure  to  pay  an  assessment  the 
treasurer  may  sell  such  number  of  shares  as  may  be  necessary 
to  pay  the  delinquent  assessment  and  all  costs  and  charges 
incidental  thereto.  The  time  and  place  of  sale  and  amount 
due  per  share  must  be  advertised  for  three  successive  weeks 
before  the  sale,  and  notice  must  be  mailed  to  the  delinquent 
stockholders. 

Dissolution. 

54.  Corporations  may  be  voluntarily  dissolved  by  the 
written  consent  of  all  of  the  stockholders,  or  by  a  vote  of  two- 
thirds  in  interest  of  all  the  stockholders,  by  the  expiration  of 
its  charter,  by  the  courts  in  insolvency  proceedings,  by  act  of 
the  legislature,  or  by  gubernatorial  proclamation  for  failure 
to  pay  its  taxes. 

Insolvency. 

55.  Section  84.  *'In  case  of  the  insolvency  of  any  cor- 
poration the  laborers  and  workmen,  and  all  persons  doing  la- 
bor or  service  of  whatever  character,  in  the  regular  employ 
of  such  corporation,  shall  have  a  first  prior  lien  upon  the  assets 
thereof  for  the  amount  of  wages  due  to  them  respectively  for 
all  labor,  work  and  services  done,  performed,  or  rendered 
within  two  months  next  preceding  the  date  when  proceedings 
in  insolvency  shall  be  actually  instituted  and  begun  against 
such  insolvent  corporation." 

56.  Section  85.  "Such  lien  shall  be  prior  to  all  other 
liens  that  can  or  may  be  acquired  upon  or  against  such  assets, 
except  the  lien  and  encumbrance  of  a  chattel  mortgage,  re- 
corded more  than  two  months  next  preceding  the  date  when 
proceedings  in  insolvency  shall  have  been  actually  instituted 


AND    COEPOEATION    LAW  31 

against  such  insolvent  corporation,  and  except  the  Hen  and 
encumbrance  of  a  chattel  mortgage  recorded  within  two 
months'  next  preceding  the  date  when  proceedings  in  insolv- 
ency shall  have  been  actually  instituted  against  such  insolvent 
corporation,  for  money  loaned  or  for  goods  purchased  within 
said  period  of  two  months ;  and  also  except  as  against  the  lien 
of  mortgages  given  upon  the  lands  and  real  estate  of  such  in- 
solvent corporation." 

57.  ''This  Section  defines  and  limits  the  only  liens  which 
are  allowed  to  take  preference  over  the  lien  of  laborers." — Dill. 

Receiver's  Services. 

58.  Section  85.  Before  distribution  of  the  assets  of  an 
insolvent  corporation  among  the  creditors  or  stockholders,  the 
Court  of  Chancery  shall  allow  a  reasonable  compensation  to 
the  Receiver  for  his  services,  and  the  cost  and  expenses  of  the 
administration  of  his  trust,  and  the  cost  of  the  proceedings 
in  said  court,  to  be  first  paid  out  of  said  assets. 

59.  Section  86.  After  payment  of  all  allowances,  ex- 
penses and  costs,  and  the  satisfaction  of  all  special  and  general 
liens  upon  the  funds  of  the  corporation  to  the  extent  of  their 
lawful  priority,  the  creditors  shall  be  paid  proportionally  to 
the  amount  of  their  respective  debts,  excepting  mortgage  and 
judgment  creditors  when  the  judgment  has  not  been  by  con- 
fession for  the  purpose  oT  preferring  creditors ;  and  the  cred- 
itors shall  be  entitled  to  distribution  on  debts'  not  due,  making 
in  such  case  a  rebate  of  interest,  when  interest  is  not  accruing 
on  the  same;  and  the  surplus  funds,  if  any,  after  payment  of 
the  creditors  and  the  cost,  expenses  and  allowances  aforesaid, 
and  the  preferred  stockholders  shall  be  divided  and  paid  to  the 
general  stockholders  proportionately,  according  to  their  re- 
spective shares. 

Reorganization. 

60.  When  a  company  shall  have  passed  into  the  hands  of 
a  receiver  and  thereafter  shall  have  paid  or  provided  for  its 
debts,  and  have  a  residue  of  capital  sufficient  to  resume  busi- 
ness, the  Court  of  Chancery  may  direct  the  receiver  to  recon- 
vey  the  property  remaining,  to  the  corporation;  and  a  ma- 
jority in  interest  of  the  stockholders  may  agree  upon  a  plan  of 
reorganization,  and  with  the  consent  of  said  court  mortgage 
its  property  and  issue  bonds,  or  debentures,  or  additional 
stock,  or  both,  and  may  use  these  for  the  purpose  of  satisfying 
the  claims  of  creditors  who  may  be  willing  to  compromise  in 
this  way,  or  they  may  sell  them  for  the  purpose  of  effecting  re- 
organization. 


32  COEPORATION  ACCOUNTINa 

Mergers. 

6i.  It  may  be  of  interest  to  state  that  New  Jersey  cor- 
porations may  form  mergers  in  accordance  with  the  provisions 
of  the  Corporation  Act;  they  may  also  own  stock  in  other 
corporations ;  in  other  words,  the  formation  of  "Holding  Com- 
panies" is  permissible  under  the  New  Jersey  law. 

Foreign  Corporations. 

62.  Before  doing  business  in  New  Jersey,  foreign  cor- 
porations must  file  copy  of  charter,  statement  of  capital  stock, 
amount  issued,  nature  of  business,  etc.  They  may  own  and 
convey  real  estate  in  New  Jersey.  They  shall  be  subject  to 
the  provisions  of  the  Corporation  Act,  as  far  as  they  can  be 
applied  to  foreign  corporations;  and  they  shall  be  subject  to 
the  same  taxes,  etc.,  as  domestic  corporations.  The  cost  for 
filing  statement,  etc.,  and  issuing  Certificate  of  Authority  is 
$10. 

Fees  and  Taxes. 

63.  The  incorporation  fee  is  20c  for  each  $1000  of  capital 
stock,  but  in  no  case  less  than  $25.  For  increase  of  capital 
stock  $20  for  each  additional  $100,000.  For  consolidation  or 
mergers  not  less  than  $20. 

64.  The  Franchise  tax  is  one-tenth  of  one  per  cent  on  all 
amounts  of  stock  issued  and  outsanding  up  to  and  including 
the  sum  of  $3,000,000.  Up  to  and  not  exceeding  $5,000,000 
one-twentieth  of  one  per  cent,  and  $50  additional  for  every 
million  dollars  in  excess  of  $5,000,000. 

65.  The  foregoing  synopsis  is  what  it  purports  to  be,  a 
review  of  the  salient  points  of  the  New  Jersey  Corporation 
laws.  It  is  not  within  the  scope  nor  purpose  of  this  work  to 
give  the  entire  law  in  all  its  phrases  as  same  is  embodied  in 
the  Act  and  construed  by  the  courts.  Those  desiring  a  com- 
plete and  authoritative  annotated  edition  of  the  "Corporation 
Act"  should  obtain  a  copy  of  "Dill  on  New  Jersey  Corpora- 
tions," which  may  be  obtained  through  any  book  seller. 

Courts  Opposed  to  Water. 

65.  (a)  The  following  clipping  from  the  Financial  Age, 
N.  Y.,  March  13,  1905,  is  interesting  to  those  who  have  aught 
to  do  with  corporation  of  the  aqueous  brand: 


AND    COEPOEATION    LAW  33 

A  New  Jersey  Decision  Against  Stock  Watering. 

The  New  Jersey  Court  of  Errors  and  Appeals  has  deliv- 
ered a  hard  blow  at  the  flotation  of  companies  formed  by  com- 
bining numerous  plants  and  capitalizing  the  whole  at  figures 
in  excess  of  the  true  value  .The  suit  in  point  was'  that  of 
Charles  W.  Volney  against  Lewis  Nixon  for  the  recovery  of 
one-half  of  $350,000  par  value,  fully  paid-up  stock  of  the  In- 
ternational Smokeless  Powder  &  Dynamite  Company.  Nixon 
won  in  the  Court  of  Chancery  and  the  Court  of  Errors  last 
week  affirmed  that  decision. 

The  plaintiff  invented  a  smokeless  powder  and  organized 
a  company,  Nixon  advanced  about  $30,000  for  the  erection  of 
a  plant,  and  was  given  stock  in  the  Volney  Company.  Upon 
organization  of  the  International  Company  the  Volney  plant 
was  turned  over  to  it.  Volney  claims  he  and  Nixon  were  to 
receive  10  shares  of  International  stock  for  each  share  of  Vol- 
ney stock.  Volney  further  claims  that  the  transaction  was 
made  through  Nixon,  and  he  never  got  his  share  of  the  new 
stock. 

The  opinion  of  the  court  says  it  is  perfectly  plain  that  the 
agreement  upon  which  Volney  bases  his  claim  for  the  receipt 
of  stock  in  the  International  Company  was  far  in  excess  of 
the  value  of  the  plant  and  patent  turned  over.  The  opinion 
caustically  adds :  "It  is  the  settled  policy  of  the  Courts  in  this 
State  not  to  aid  in  the  enforcement  of  such  contracts  having 
either  an  illegal  or  immoral  purpose,  even  though  the  objec- 
tionable feature  has  been  accomplished  and  there  remains  only 
the  distribution  of  the  proceeds  among  the  contracting 
parties.  Jersey  justice,  like  "Jersey  lightning,"  strikes  quickly 
and  surely  at  all  who  disregard  its  power. — Financial  Age,  N. 
Y.,  March  13,  1905. 

Interest  Rates. 

The  legal  and  contract  rate  of  interest  in  New  Jersey  is 
six  per  cent ;  usury  is  punishable  by  forfeiture  of  entire  interest 
and  costs.    Corporations  may  not  plead  usury. 


CHAPTER  III. 

A  Digest  of  the  General  Corporation  Laws  of  Delaware, 
Annotated  and  Compared  With  Those  of  New  Jersey — Points 
of  Agreement  and  Points  of  Difference. — Some  Distinct  and 
Interesting  Features. 


66.  Hon.  Caleb  R.  Layton  in  speaking  of  the  corporation 
laws  of  Delaware  says :  "It  is  believed  that  no  state  has  on 
its  statute  books  more  complete  and  liberal  corporation  laws 
than  these";  and  he  cites  the  following  as  some  of  the  main 
advantages : 

''Corporations  may  conduct  business  in  this  or  any  state 
or  foreign  county. 

"Stockholders'  and  directors'  meetings  may  be  held  out  of 
the  state  if  desired. 

"Original  stock  and  transfer  books  may  be  kept  out  of  the 
state,  if  duplicates  of  such  books'  be  kept  at  the  principal  of- 
fice in  the  state. 

"Stock  fully  paid  up  is  non-assessable,  and  fully  paid-up 
non-assessable  stock  can  be  issued  for  property,  labor  and  ser- 
vices. 

''No  stock  nor  bonds  issued  can  be  taxed  by  this  state, 
when  the  same  is  owned  by  non-residents  of  this  state,  or 
foreign  corporations. 

"State  tax  is  about  one-half  of  that  under  laws  of  other 
states  offering  proper  security  to  stockholders. 

"Delaware  corporations  may  confer  upon  the  holders  of 
bonds  or  debentures  the  power  to  vote  to  the  same  extent  and 
in  the  same  manner  as  stockholders." 

A  Comparison. 

67.  We  observe  a  number  of  striking  differences  between 
these  provisions  and  those  of  the  New  Jersey  laws ;  such  as' 
the  holding  of  stockholders'  meetings  outside  of  the  state ;  the 
keeping  of  the  original  stock  and  transfer  ledgers  out  of  the 
state ;  the  issuing  of  stock  for  labor  and  services,  which  can 
only  be  done  in  certain  cases  in  New  Jersey,  the  voting  power 
attached  to  bonds  and  debentures,  etc. 


AND    COKPOEATION    LAW  33 

Article  IX  of  the  Constitution. 

68.  Sec.  I.  No  corporation  shall  hereafter  be  created, 
amended,  renewed  or  revised  by  special  act,  but  only  by  or 
under  general  law,*  nor  shall  any  existing  corporate  charter  be 
amended,  renewed,  or  revised  by  special  act,  but  only  by  or 
under  general  law;  but  the  foregoing  provisions  shall  not 
apply  to  municipal  corporations,  banks,  or  corporations  for 
charitable,  penal,  reformatory,  or  educational  purposes,  sus- 
tained in  whole  or  in  part  by  the  state.  The  general  assembly 
shall,  by  general  law,  provide  for  the  revocation  or  forfeiture 
of  the  charters  of  all  corporations  for  the  abuse,  misuse,  or 
non  user  of  their  corporate  powers,  privileges  or  franchises. 
Any  proceeding  for  such  revocation  or  forfeiture  shall  be  taken 
by  the  Attorney  General,  as  may  be  provided  by  law.  No 
general  incorporation  law,  nor  any  special  act  of  incorporation, 
shall  be  enacted  without  the  concurrence  of  two-thirds  of  all 
the  members  elected  to  each  house  of  the  General  Assembly. 

Forming  Corporations  in  Delaware. 

69.  Three  or  more  persons  may  form  a  corporation  for  the 
transaction  of  any  lawful  business,  excepting  those  excluded 
by  Section  i  of  Article  IX  of  the  Constitution.  Special  regu- 
lations apply  to  railroads,  telegraph  and  telephone  companies 
operating  outside  the  state. 

Existence  of  Corporation. 

70.  The  existence  of  a  corporation  dates  from  the  filing  of 
the  Certificate  of  incorporation  in  the  office  of  the  Secretary  of 
State  and  a  certified  copy  thereof  in  the  office  of  the  Recorder 
of  Deeds  of  the  County  wherein  the  principal  office  of  the 
company  shall  be  located.  This  certificate  must  be  signed  and 
sealed  by  the  original  subscribers  or  corporators  and  acknowl- 
edged before  some  one  competent  to  administer  an  oath.  Be- 
tween the  time  of  filing  the  certificate  and  the  election  of  a 
board  of  directors  these  original  corporations  shall  direct  and 
manage  the  affairs  of  the  new  company. 

First  Meeting. 

71.  Sec.  II.  The  first  meeting  of  every  corporation  shall 
be  called  by  a  notice  signed  by  a  majority  of  the  incorporators 
*  *  *  designating  the  time,  place  and  purpose  of  the  meeting, 
and  such  notice  shall,  at  least  two  weeks  before  the  time  of 
any  such  meeting,  be  published  three  times'  in  some  news- 
paper of  the   county  *  *  *  or   first   meeting  may  be   called 


36  CORPORATION  ACCOUNTING 

without  publication  if  two  days  notice  be  personally  served 
on  all  parties  named  in  the  certificate ;  or  if  all  parties  named 

*  *  *  shall  in  writing,  waive  notice  and  fix  a  time  and  place 
of  meeting,  then  no  notice  of  publication  shall  be  required. 

*  *  *   (This  is  practically  the  same  as  the  *New  Jersey  law.) 

Corporate  Powers. 

'J2.  The  following  is  a  brief  summary  of  the  powers 
granted :  The  power  of  succession  for  the  period  of  incor- 
poration, or  perpetual  succession  if  no  limit  is  named;  the 
usual  powers  of  plaintiff  and  defendant  in  any  court;  the 
power  to  make,  use  and  alter  a  common  seal;  the  power  to 
hold,  purchase  and  convey  real  or  personal  property  and  to 
mortgage  any  or  all  of  its  property  and  franchises ;  (the  power 
to  hold  implies  the  power  to  acquire  by  bequest,  except  in 
case  of  religious  corporations)  the  power  to  appoint  officers 
and  agents'  for  the  conduct  of  its  business  and  to  fix  their  sal- 
aries ;  the  power  to  make  by-laws  consistent  with  the  laws  of 
the  United  States  and  of  the  State  of  Delaware ;  the  power  of 
dissolution  and  the  winding  up  of  its  affairs ;  the  power  to 
conduct  business  in  any  state,  territory  or  colony  of  the  United 
States  or  in  foreign  countries,  and  to  have  any  number  of  of- 
fices outside  of  Delaware;  also  "to  purchase,  mortgage  and 
convey  real  and  personal  property  out  of  the  State";  if  its 
charter  so  specifies.* 

73.  Reviewing  the  above  powers  we  find  many  important 
grants,  such  as  the  power  of  perpetuity;  which  means,  that, 
unless  the  incorporators  limit  the  period  of  corporate  exist- 
ence, the  corporation  exists  for  all  time ;  also  the  corporation 
is  not  limited  to  its  necessities  in  the  acquisition  of  real  estate, 
but  may  buy  and  sell  without  limit  and  acquire  by  devise.  It 
may  also  mortgage  its  property  without  having  recourse  to 
either  the  courts  or  the  stockholders.^  This  last  pro- 
vision is  defeasible  on  the  ground  that  the  law  grants 
certain  legal  powers  to  a  corporation;  but  as  these 
legal  powers  can  only  be  exercised  by  an  agency  possessing 
the  physical  powers  of  energy  and  action,  and  the  metaphysi- 
cal powers  of  reasoning  and  judgment,  it  is  only  rational  to 
assume  that  the  enabling  powers  granted  to  a  corporation  ex- 
tend to  its  agency;  and  as  this  agency — the  board  of  directors 
— is  representative  of  the  stockholders,  the  logical  inference 

*A  corporation  has  such  powers  as  are  expressed  or  implied  in  its 
charter  (consistent  with  law)  and  powers  not  so  expressed  or  implied  are 
inhibited.  Failure  to  state  means  inability  to  assume.  The  one  excep- 
tion to  this  is  the  State  of  Maine. 

iSee  foot  note  to  paragraph  30. 


AND    COBPOEATION    LAW  3T 

is  that  the  act  of  the  Board  on  behalf  of  the  corporation  is  a 
corporate  act,  requiring  no  specific  authority  from  the  stock- 
holders. *  In  Delaware,  as  in  New  Jersey,  all  extraordinary 
powers,  to  be  inherent  of  the  corporation,  must  be  specified 
in  the  certificate  or  articles  of  incorporation. 

Further  Powers. 

74.  For  further  powers  see  paragraph  31  of  this  work. 
The  additional  powers  of  the  New  Jersey  and  Delaware  acts 
are  almost  word  for  word  alike  and  the  comments  in  para- 
graph 32  apply  with  few  exceptions,  with  equal  force  here. 

By-Laws. 

75.  The  power  to  make  by-laws'  may  be  conferred  on  the 
directors  by  the  certificate  of  corporation,  but  this  is  a  special 
privilege,  not  a  vested  right,  and  may  be  nullified  at  any  time 
by  the  stockholders,  in  whom  the  power  to  make  and  alter 
by-laws  reposes. 

Provisions  of  By-Laws. 

"j^.  The  by-laws  shall  provide  for  the  number  of  directors 
and  also  for  the  changing  of  that  number,  for  the  regulation 
of  meetings,  the  transfer  of  stock,  the  filling  of  vacancies  and 
the  holding  of  meetings  outside  the  State. 

Directors. 

yj.  In  no  case  shall  there  be  less  than  three  directors,  ex- 
cept that  a  majority  of  the  board  may  designate  two  of  their 
number  as  an  "Executive  Committee"  who  may  be  endowed 
with  all  the  usual  powers  of  the  board  and  may  act  in  its 
stead.  At  least  one  director  must  be  a  resident  of  the  State 
of  Delaware.  As  in  New  Jersey,  the  directors  may  be  divided' 
into  three  classes,  and  if  so  classified,  instead  of  the  whole 
board  being  elected  annually,  they  shall  hold  office  for  one, 
two  or  three  years,  respectively;  one  class  retiring  each  year. 
Directors  may  be  elected  outside  the  state — this  obviates  the 
necessity  of  directors  living  in  another  State  going  to  Dela- 
ware to  hold  meetings  or  to  be  elected.  Every  director  must 
be  a  stockholder  and  must  own  at  least  three  shares  of  the 
Capital  Stock.     Directors  shall  have  the  appointive  power  to 

*It  is  both  logical  and  necessary  that  the  consumate  act  of  the  Board 
should  be  a  corporate  act,  but  there  are  times  when  the  Board  should  be 
restrained  from  acting.  The  position  of  the  principal  must  always  re- 
main superior  to  that  of  the  agent. 


^8  CORPOEATION  ACCOUNTING 

fill  vacancies'  in  their  body,  unless  there  is  an  inhibitory  clause 
in  the  by-laws.  Failure  to  hold  directors'  meetings  in  accord- 
ance with  the  date  specified  in  the  by-laws  will  not  work  a 
forfeiture  of  the  charter;  but  on  the  application  of  one  stock- 
holder, the  Chancellor  may  summarily  order  an  election  to  be 
held;  and  the  board  will  be  punished  for  failure  to  comply 
with  this  order. 

Dividends. 

78.  It  is  one  of  the  functions  of  the  directors  to  declare 
and  pay  dividends ;  but  dividends  can  only  be  paid  out  of  pro- 
fits earned.  The  certificate  of  incorporation  may  confer  on  the 
directors  the  power  to  fix  a  reserve  to  be  withheld  out  of  the 
profits,  for  the  creation  of  additional  working  capital,  for  con- 
tingencies' or  other  purposes,*  or  the  stockholders  may  fix 
this  reserve.  In  either  case  the  directors  shall  have  power  to 
distribute  the  balance  of  profits  over  and  above  this  reserve  in 
dividends.  It  is  permissible  to  pay  dividends  either  in  stock 
at  par,  or  in  cash. 

Loaning  Money. 

79.  With  the  exception  of  Building  and  Loan  Associa- 
tions, no  corporation  can  loan  money  to  any  officer  of  the  cor- 
poration; nor  can  stock  of  the  company  be  accepted  as  se- 
curity for  such  loans ;  nor  can  a  corporation  take  a 
lien  on  its  own  stock  unless  it  is  necessary  to  protect  itself 
from  loss.    The  officers  violating,  or  assenting  to  the  violation 

-of  these  provisions,  shall  be  jointly  and  severally  liable.  This 
is  a  measure  of  protection  for  stockholders  and  creditors. 

Elections  and  Meetings. 

80.  Unless  otherwise  provided  in  the  certificate,  all  elec- 
tions shall  be  by  ballot.  Every  stockholder  shall  have  one 
vote  for  every  share  of  stock  held.  Voting  may  be  in  person 
or  by  proxy;  but  there  is  no  provision  for  cumulative  voting. 
Trustees  or  fiduciary  agents  may  vote  stock  held  by  them  in 
trust.  Pledged  stock  can  be  voted  by  the  pledger  unless  he 
shall  have  waived  his  right  to  vote  in  favor  of  the  pledgee; 
but  stock  transferred  within  twenty  days  prior  to  stockhold- 
ers' meeting  shall  not  be  entitled  to  vote.  This  provision 
tends  to  prevent  in  a  great  measure  the  political  manipulation 
of  stock  for  election  purposes.    A  list  of  the  stockholders  must 

*A  wise  provision  if  not  abused.  Stockholders  are  rarely  competent 
to  do  this  but  incompetency  is  better  than  dishonesty.  See  foot  note  to 
paragraph  45. 


AND    COKPOEATION    LAW  39" 

be  made  out  in  alphabetical  order  by  the  secretary,  ten  days 
prior  to  the  annual  meeting,  and  this  list  shall  be  open  to  the 
inspection  of  any  stockholder. 

Evidence  of  Right  to  Vote. 

8i.  The  stock  ledger  shall  be  the  only  evidence  of  a  stock- 
holder's right  to  vote.  Unless  the  by-laws  so  provide,  these 
meetings  must  be  held  in  the  State  of  Delaware,  at  the  prin- 
cipal or  registered  office  of  the  Company ;  but  the  stocKnolders- 
need  not  be  present  in  person.*  The  name  of  every  corpora- 
tion must  be  conspicuously  displayed  on  its  principal  office. 

Important  Provisions. 

82.  A  unique  and  important  provision  may  be  made  in 
the  certificate  of  incorporation  whereby  the  holders  of  bonds 
or  debentures,  however  secured,  have  the  same  right  to  vote 
as  stockholders ;  and  also  the  right  to  examination  of  the 
books  in  case  default  is  made  in  the  interest  or  principal  of 
such  bonds  or  debentures.  This  gives  to  this'  class  of  credit- 
ors a  voice  in  the  management  and  also  a  right  to  examine 
into  the  condition  of  the  company.  This  is  indeed  a  large 
measure  of  protection  to  the  bondholders ;  and  here  is  where 
the  public  accountant  should  be  called  into  service. 

Issue  and  Transfer  of  Stock. 

83.  In  Delaware,  stock  can  be  issued  for  money,  labor, 
property  (real  or  personal),  leases  or  franchises.  As  in  New 
Jersey,  the  judgment  of  the  directors  as  to  the  value  of  any 
of  these  shall  be  conclusive ;  providing  of  course  there  is  no 
fraud.  ^  Stock  shall  be  paid  for  in  such  amounts  and  at  such 
times  as  the  directors  may  determine.  The  amount  of  the 
authorized  capital  must  be  stated  in  the  certificate — in  no  case 
less  than  $2000.  The  least  paid-up  capital  with  which  it  can 
commence  business  is  $1000.  All  stock  is  regarded  as  per- 
sonal property  and  is  transferable  under  regulation  of  the  by- 
laws. When  transferred  as  collateral,  it  is  to  be  so  entered 
on  the  transfer-books. 

Kinds  of  Stock. 

84.  Delaware  corporations  may  issue  two  or  more  kinds 
of  stock  with  such  designations,  preference  and  voting  powers, 
or  with  such  restrictions  and  qualifications  as  shall  be  provided 

*See  foot  note  to  paragraph  40a  on  the  giving  of  proxies. 
iSee  foot  note  to  paragraph  47. 


40  COHPOEATION  ACCOUNTING 

for  in  the  certificate  of  corporation.  Preferred  stock  may  not 
exceed  two-thirds  of  the  actual  paid  in  capital  and  may  be 
subject  to  redemption  at  not  less  than  par.  In  no  case  shall 
the  preference  exceed  eight  per  cent.  Preferred  dividends  may 
be  made  cumulative. 

85.  It  will  be  seen  from  the  foregoing  that  the  certificate 
in  this,  as  in  other  matters,  allows  of  a  wide  latitude  in  the 
designation  and  voting  powers  of  stock,  and  reminds  us  that 
the  certificate  should  have  a  broad  foundation,  admitting, 
though  not  compelling,  the  exercise  of  all  the  potential  powers 
of  the  Corporation  Act  itself.  The  judicious  use  of  the  word 
"may"  is  to  be  recommended ;  "shall"  can  be,  and  is,  construed 
as  mandatory,  but  "may"  cannot  be  so  construed. 

Certificate  of  Incorporation. 

86.  In  a  general  way,  the  certificate  shall  set  forth  the 
name  of  the  corporation;  the  town  or  city  and  the  county  in 
which  the  principal  office  is  to  be  located;  the  nature  of  the 
business ;  (right  here  is  where  the  scope  of  the  business  is  to 
be  enlarged  so  as  to  include  all  probable  future  needs)  ;  the 
amount  of  the  capital  stock ;  the  amount  with  which  the  busi- 
ness is  to  be  commenced;  the  various  classes  of  stock  to  be 
issued;  the  names  and  residences  of  original  subscribers; 
duration  of  the  corporation,  if  it  is  to  be  limited;  if  private 
property  of  stockholders  shall  be  subject  to  payment  of  cor- 
porate debts ;  and  any  provision,  "creating,  defining,  limiting 
and  regulating"  the  powers  of  the  corporation,  its  directors 
or  any  class  of  stockholders. 

Officers. 

87.  Every  corporation  shall  have  a  president,  secretary 
and  treasurer.  The  secretary  and  treasurer  may  be  the  same 
person,  or  the  vice  president  and  treasurer  may  be  the  same 
person,  or  the  vice  president  may  also  be  the  secretary.  The 
president  must  be  one  of  the  directors.  All  officers  may  be 
chosen  either  by  the  directors  or  stockholders.  The  secretary 
shall  be  sworn  to  discharge  his  duties  faithfully,  and  a  bond 
shall  be  required  of  the  treasurer. 

Stockholders'  Liability. 

88.  Stockholders  shall  be  liable  only  for  the  par  value  of 
their  subscriptions.  If  the  company  should  fail  before  they 
liave  paid  in  the  full  amount  of  their  subscriptions,  they  shall 
be  required  to  pay  in  the  balance  due,  or  so  much  thereof  as 
may  be  necessary,  to  satisfy  the  claims  of  creditors,  but.  Sec. 


AND    CORPOEATION    LAW  41 

51  provides,  "No  suit  shall  be  brought  against  any  stockholder 
for  any  debt  of  the  corporation  *  ''''  *  until  judgment  be  ob- 
tained therefor  against  such  corporation  and  execution 
thereon  is  returned  unsatisfied." 

89.  If  a  corporation  desires  to  enhance  its  credit  it  may 
provide  in  its  certificate  that  the  property  of  stockholders 
shall  be  liable  for  corporation  debts;  but  unless  this  provision 
is  deliberately  made  the  maximum  stockholder's  liability  is 
fixed  and  absolute. 

Assessments. 

90.  ''The  capital  stock  shall  be  paid  in  such  amounts  and 
Rt  such  times  as  the  directors  may  require."  The  directors 
may  levy  an  assessment  on  unpaid  stock  at  any  time  and  for 
such  amount  as  in  their  judgment  the  necessities  of  the  busi- 
ness require ;  but  in  no  case  can  these  assessments  exceed  the 
par  of  the  stock.  The  word  "necessities,"  seems  to  be  in- 
serted to  protect  the  stockholder  from  the  caprice  or  cupidity 
of  a  venal  board.  Thirty  days  notice  of  an  assessment  must 
be  given  by  publication  in  a  newspaper,  or  by  written  notice 
mailed  to  stockholders. 

Failure  to  Pay  Assessments. 

91.  Delinquent  assessments  may  be  collected  by  an  action 
at  law ;  or  the  directors  may  sell  sufficient  shares  of  delinquent 
stockholders  to  pay  assessments  and  all  incidental  costs ;  and 
the  purchaser  shall  be  entitled  to,  and  receive  a  certificate  for 
shares  so  purchased;  providing  in  case  of  sale  that  notice  of 
the  time  and  place  of  sale  and  sum  due  on  each  share  shall 
have  been  given  by  publication  once  a  week  for  three  succes- 
sive weeks  in  a  newspaper  of  the  county  where  the  principal 
office  is  located,  and  by  mailing  copy  of  said  notice  of  sale  to 
last  known  address  of  stockholder,  at  least  20  days  before  day 
of  sale. 

Forfeiture  of  Stock. 

92.  If  the  amount  of  assessment  is  not  recovered  at  law, 
or  not  paid  in  by  stockholder,  and  no  bid  sufficient  to  pay  as- 
sessment and  cost  is  received,  the  stock,  and  all  sums  pre- 
viously paid  thereon,  shall,  within  one  year,  be  forfeited  to 
the  corporation. 

Dissolution. 

93.  Corporations  organized  under  this  Act  may  be  dis- 
solved by  a  two-thirds  vote  of  all  the  stock  in  interest,  at  a 


42  COKPORATION  ACCOUNTING 

meeting  called  especially  for  that  purpose.  The  directors  may 
call  a  meeting  for  such  purpose  when  in  their  judgment  the 
best  interests  of  the  corporation  will  be  served  thereby.  No- 
tice by  mail  and  by  publication  must  be  served  on  stock- 
holders. When  all  the  requirements  of  the  statute  have  been 
complied  with,  the  Secretary  of  State  will  issue  a  certificate 
of  dissolution;  or  such  certificate  shall  be  issued,  without  a 
meeting  or  publication,  when  all  of  the  stockholders  shall,  in 
writing,  consent  to  the  dissolution;  however,  all  corporations 
dissolved  either  in  this  way,  by  expiration  of  charter,  or  other- 
wise, shall  continue  to  exist  as  a  corporate  body  for  the  pur- 
pose of  bringing  or  defending  suits,  settling  up  their  business, 
disposing  of  their  property  and  distributing  their  capital  as 
realized  among  their  stockholders,  for  a  period  of  three  years 
from  such  dissolution ;  but  they  must  not  continue  in  the  busi- 
ness in  which  they  had  been  engaged.  The  directors  or  execu- 
tive committee  shall  act  as  trustees  for  this  purpose  and  they 
shall  be  jointly  and  severally  liable  for  the  assets  of  the  cor- 
poration. 

Receivers. 

94.  On  the  application  of  creditors  or  stockholders  of  a 
dissolved  corporation  the  Court  of  Chancery  may  appoint  a 
receiver  to  wind  up  the  corporation's'  affairs;  with  power  to 
collect  its  bills,  discharge  its  debts,  and  prosecute  and  defend 
in  its  name.  Section  45  of  the  Corporation  Act  reads  as  fol- 
lows: 

Final  Settlement. 

95.  "The  said  trustees  or  receivers  after  payment  of  all 
allowances,  expenses  and  costs  and  the  satisfaction  of  all  spe- 
cial and  general  liens  upon  the  funds  of  the  corporation  to  the 
extent  of  their  lawful  priority,  shall  pay  the  other  debts  due 
from  the  corporation,  if  the  funds  in  their  hands  shall  be  suf- 
ficient therefor,  and  if  not,  they  shall  distribute  the  same 
ratably  among  the  creditors  who  shall  prove  their  debts  in  the 
manner  that  shall  be  directed  by  an  order  or  decree  of  the 
Court  for  that  purpose;  and  if  there  shall  be  any  balance  re- 
maining after  the  payment  of  such  debts  and  necessary  ex- 
penses, they  shall  distribute  and  pay  the  same  to  and  among 
those  who  shall  be  justly  entitled  thereto,  as  having  been 
stockholders  of  the  corporation,  or  their  legal  representatives." 

Foreign  Corporation. 

96.  Before  commencing  business  in  Delaware,  foreign 
corporations  must  file  with  the  Secretary  of  State  certified 


AND    COEPOEATION    I/AW  43 

copy  of  charter  and  names  of  the  authorized  agents  in  this 
state  on  whom  service  can  be  made,  also  a  sworn  statement 
of  assets  and  HabiHties,  and  pay  a  fee  of  $50. 

Fees  and  Taxes. 

97.  The  fee  for  filing  certificate  of  corporation  shall  be 
15c  for  every  $1000  capital  stock — in  no  case  less  than 
$20;  and  the  same  fee  for  increase  of  capital  stock.  Where 
mergers  are  formed  an  additional  fee  of  15c  for  every  $1000 
capital  stock  of  the  consolidation  in  excess  of  the  joint  capital 
of  the  companies  merged.  Religious  or  charitable  corpora- 
tions are  exempt  from  the  payment  of  fees. 

98.  Franchise  taxes'  vary  with  the  nature  of  the  corpora- 
tion; but  for  general  business,  mining  or  manufacturing  cor- 
porations the  tax  is  one-twentieth  of  one  per  cent  on  actual 
paid-up  capital  up  to  $3,000,000,  and  one-fortieth  of  one  per 
cent  on  stock  issued  and  outstanding  from  $3,000,000  to 
$5,000,000,  and  $30  on  each  additional  million.  For  foreign 
corporations  the  state  tax  is  $50  and  fees  to  the  Secretary  of 
State  and  prothonotaries  (Clerks  of  Court)  $10. 

General. 

99.  Delaware  corporations  have  two  years  from  date  of 
organization  in  which  to  commence  business  before  forfeiture 
of  franchise.  They  may  extend  the  period  of  their  incorpora- 
tion, may  amend  their  certificate,  increase  or  decrease  their 
capital  stock,  merge  or  consolidate,  may  change  the  par  value 
of  their  shares  but  there  does  not  appear  to  be  any  special 
provision  for  reorganization  of  insolvent  corporations. 

Interest  Rates. 

The  legal  and  contract  rate  of  interest  in  Delaware  is  six 
per  cent.  The  penalty  for  usury  is  forfeiture  of  a  sum  of 
money  equal  to  the  amount  loaned.  There  are  no  days  of 
grace  in  Delaware. 


CHAPTER  IV. 

An  Epitome  of  the  General  Corporation  Laws  of  Arizona. 
— Advantages  Arizona  Offers  to  Those  Who  Choose  to  Incor- 
porate Under  Its  Laws. — A  Simple  and  Unambiguous  Set  of 
Laws  Embodying  New  Features,  and  Establishing  New  Pre- 
cedents. 


lOO.  In  1903  Arizona  revised  its  corporation  laws  so  as  to 
grant  larger  privileges  and  more  exemptions'  to,  and  impose 
fewer  restrictions  upon  corporations  organized  under  its  laws. 
These  laws,  simple  and  unambiguous,  resemble  in  many  points 
those  of  New  Jersey  and  Delaware ;  while  in  other  points  they 
break  new  ground,  establish  new  precedents,  and  suggest  to 
one's  mind  that  there  is  no  "Ne  Plus  Ultra"  sign  along  the  cor- 
poration highway. 

Corporations  in  General. 

loi.  Sec.  4.  Any  number  of  persons  may  associate  them- 
selves together  and  become  incorporated  for  the  transaction 
of  any  lawful  business,  but  such  corporation  shall  confer  no 
powers  or  privileges  not  possessed  by  natural  persons,  except 
as  herein  provided. 

Sec.  5.  Among  the  powers  of  such  bodies  corporate  shall 
be  the  following: 

1.  To  have  perpetual  succession. 

2.  To  sue  and  be  sued  by  the  corporate  name. 

3.  To  have  a  common  seal  and  alter  the  same  at  pleasure. 

4.  To  render  the  shares  or  interest  of  stockholders  trans- 
ferable and  prescribe  the  mode  of  making  such  trarnsfers. 

5.  To  exempt  the  private  property  of  members  from  lia- 
bility for  corporate  debts. 

6.  To  make  contracts,  acquire  and  transfer  property,  pos- 
sessing the  same  powers  in  such  respects  as  private  individ- 
uals now  enjoy. 

7.  To  establish  by-laws  and  make  all  rules  and  regula- 
tions deemed  expedient  for  the  management  of  their  affairs 
not  inconsistent  with  the  constitution  and  laws  of  the  United 
States  and  laws  of  Arizona. 


AND    COKPOEATION    LAW  45 

102.  Inasmuch  as  "a  number"  is  a  unit,  or  a  collection  of 
units,  the  liberal  construction  to  be  placed  on  Section  4  is 
that  one  or  more  persons  can  form  a  corporation  under  these 
laws.  If  this  is  not  the  intent  of  the  Act  then  the  construc- 
tion is  faulty  and  should  read,  "Two  or  more  persons"  or 
*'any  number  above  one";  however  one  thing  is  clear,  two 
persons  can  form  a  corporation  in  Arizona. 

103.  The  corporate  powers  2,  3,  4,  and  7  are  generic  to  all 
corporation  laws;  but  i,  5  and  6  are  specific  powers.  While 
these  powers  are  inherent  to  the  Arizona  corporation  they 
may  be  waived  or  nullified  by  the  articles  or  incorporation, 
(in  fact  the  power  of  limited  liability  is  waived  if  it  is  not 
specfically  taken  advantage  of)  hence  the  period  of  corporate 
existence  may  be  limited,  and  private  property  may  be  made 
subject  to  corporate  debts — if  the  incorporators  choose  to  do 
so  for  the  purpose  of  strengthening  their  credit.  Number  six 
grants  unabridged  personalistic  powers  in  the  purchase  and 
sale  of  real  and  personal  property. 

Commencing  Business. 

104.  Sec.  6.  (as  amended  by  Act  88,  Session  Laws  1903.) 
Before  commencing  business,  except  that  of  their  own  organ- 
ization, they  must  adopt  articles  of  incorporation,  which  shall 
be  signed  and  acknowledged  by  them  as  deeds  are  required  to 
be  acknowledged,  and  recorded  in  a  book  for  that  purpose  in 
the  office  of  the  County  Recorder  of  the  county  where  the 
principal  place  of  business  is  to  be.  The  articles  of  incorpora- 
tion must  contain : 

1.  The  name  of  the  corporators,  the  name  of  the  corpora- 
tion and  its  principal  place  of  transacting  business. 

2.  The  general  nature  of  the  business  proposed  to  be 
transacted. 

3.  The  amount  of  capital  stock  authorized  and  the  time 
when  and  conditions  upon  which  it  is  to  be  paid  in. 

4.  The  time  of  the  commencement  of  the  corporation. 

5.  By  what  officers  or  persons  the  affairs  of  the  corpora- 
tions are  to  be  conducted,  and  the  times  at  which  they  are  to 
be  elected. 

6.  The  highest  amount  of  indebtedness  or  liability  to 
which  the  corporation  is  at  any  time  to  subject  itself. 

7.  Whether  private  property  is  to  be  exempt  from  cor- 
porate debts.  Unless  so  exempted,  stockholders  are  liable  for 
the  debts  of  the  corporation  in  the  proportion  to  which  their 
stock  bears  to  the  whole  capital  stock. 


46  CORPORATION  ACCOUNTING 

Drawing  of  Articles. 

105.  It  is  important  to  observe  all  these  provisions  in 
drawing  up  articles,  as  these  requirements  are  mandatory. 
In  addition,  the  date  for  the  holding  of  annual  elections  must 
be  stated.  Many  of  these  requirements,  like  the  powers 
granted,  are  native  to  every  corporation ;  but  provisions  6  and 
7  are  exceptions.  The  incorporators  must  at  once  fix  a  limit 
of  indetbedness  beyond  which  they  may  not  pass,  and  this 
limit  must  include  contingent  as  well  as  direct  liability,  and 
in  no  case  may  it  exceed  in  amount  two-thirds  of  the  capital 
stock.  To  realize  the  importance  of  this  clause  we  should 
read  carefully  provision  7.  If  the  stockholder's  liability  is 
fixed,  he  can  risk  only  so  much  anyhow,  but  if  his  private 
property  is  subject  to  corporate  debts,  then,  he  is  greatly  con- 
cerned as  to  the  amount  of  those  debts ;  and  for  his  protection, 
in  this  latter  case,  the  law  benovelently  fixes  a  new  limit;  the 
first  being  an  absolute  limit,  the  second  a  contingent  limit; 
but  you  ask  ''What  happens  if  the  corporation  debts  exceed 

that  limit?"     The  answer  must  be the  directors  shall  be 

jointly  and  severally  liable  for  that  excess. 

106.  Reading  provision  7  of  section  6  in  connection  with 
provision  5  of  section  5  we  observe  an  inconsistency  that 
might  easily  deceive  Here  is'  a  power  rendered  impotent  by 
desuetude  and  vitalized  only  by  use ;  hence  if  we  would  use  it 
we  must  specifically  and  unequivocally  provide  that  "The  pri- 
vate property  of  members  shall  be  exempt  from  liability  for 
corporate  debts,"  otherwise,  instead  of  being  a  power,  it  be- 
comes an  infirmity. 

Publication  of  Articles. 

107.  Every  corporation  is  required  to  publish  its  articles 
of  incorporation  at  least  six  times,  and  file  an  affidavit  of  such 
publication  in  the  office  of  the  Territorial  Auditor;  but  busi- 
ness may  be  commenced  as  soon  as  articles  are  filed  in  the 
County  Recorder's  office  and  a  certified  copy  thereof  in  the 
office  of  the  Territorial  Auditor,  provided  however  that  pub- 
lication shall  be  completed  and  affidavit  filed  within  three 
months  of  the  date  of  filing  articles. 

Stock  Increased  or  Decreased. 

108.  Sec.  10  (as  amended  by  Act  88,  Session  Laws,  1903.) 
The  capital  stock  of  any  corporation  organized  hereunder  may 
be  increased  or  decreased  and  the  articles  may  be  amended 
in  any  of  the  particulars  mentioned  in  Sec.  6  of  this  Title  by 


AND    CORPORATION    LAW  47 

the  affirmative  vote  of  a  majority  of  the  stock.  Such  amend- 
ment shall  be  signed  and  acknowledged  by  the  President  and 
attested  by  the  Secretary  of  the  corporation,  "and  no  such 
amendment  shall  be  valid  unless  recorded  and  published  as 
original  articles  are  required  to  be. 

Prolonging    Corporate  Life. 

109.  Sec.  II.  Corporations  organized  under  this  Title 
may  be  formed  to  endure  for  twenty-five  years,  but  they  may 
be  renewed  from  time  to  time  for  a  period  not  exceeding 
twenty-five  years,  when  three-fourths  of  the  votes  cast  at  any 
stockholders'  meeting  duly  called  and  held  for  that  purpose 
shall  be  in  favor  of  such  renewal. 

no.  Note,  that  the  duration  of  a  limited  period  corpora- 
tion is  twenty-five  years;  but  that  limit  may  be  extended  in- 
definitely at  the  will  of  the  stockholders.  Also  observe  the 
language  of  this  Section — "three-fourths  of  the  votes  at  any 
stockholders'  meeting,  etc."  and  not  three-fourths  of  the  stock 
in  interest. 

Dissolution. 

III.  Sec.  12.  The  corporation  shall  not  be  dissolved  prior 
to  the  period  fixed  upon  in  the  articles  of  incorporation  ex- 
cept by  a  majority  vote  of  its  members,  unless  a  different  rule 
is  adopted  in  the  articles.  A  dissolved  corporation  shall  be 
post-existent  for  the  purpose  of  winding  up  its  business. 

Transferring  Stock. 

112.  Sec.  13.  Transfer  of  stock  shall  not  be  valid  except 
as  between  the  parties  thereto,  until  the  same  is  regularly 
entered  upon  the  books  of  the  company  so  as  to  show  the 
name  of  the  person  by  whom  and  to  whom  the  transfer  is 
made,  the  number  or  other  designation  of  the  shares,  and  the 
date  of  the  transfer.*  The  books  of  the  company  shall  be  kept 
so  as  to  show  intelligently  the  original  stockholders,  their 
respective  interests,  the  amount  that  has  been  paid  thereon, 
and  all  transfers  thereof ;  and  such  books  or  records  or  correct 
copies  thereof,  so  far  as  they  relate  to  the  items  mentioned 
in  this  section,  shall  at  all  times  be  subject  to  the  inspection 
of  any  stockholder  desiring  the  same. 

113.  Note  here,  that  transfers  of  stock  are  not  valid  be- 
tween the  transferee  and  the  corporation,  but  only  between 
the  parties  thereto,  until  the  transferee  is  a  stockholder  of 
record — until  then  he  has  not  the  right  to  vote,  nor  is  he  en- 
titled to  dividends.     Observe  further,  the  requirements  of  the 

*See  paragraphs  260  and  261. 


48  CORPORATION  ACCOUNTING 

statute  in  regard  to  the  keeping  a  complete  history  of  every 
transaction  in  stock,  and  the  right  granted  to  every  stock- 
holder to  examine  the  records  and  learn  the  payments  made 
and  balances  due  on  subscriptions. 

Forfeiture  of  Charter. 

114.  Any  corporation  failing  to  make  use  of  its  franchise 
for  a  continuous  period  of  five  years  forfeits  the  same ;  but 
failure  to  elect  officers  or  hold  meetings  as  provided  in  the 
by-law^s  does  not  v^ork  a  forfeiture. 

Fraudulent  Transfers. 

115.  That  there  are  persons  v^ho  would  transfer  stock  to 
an  irresponsible  person  or  a  dummy  for  the  purpose  of  escap- 
ing their  just  liabilities  there  can  be  no  doubt.  To  prevent 
the  perpetration  of  this  ethical  and  moral  w^rong  Section  six- 
teen has  been  phrased  as  follows : 

116.  Sec.  16.  Nothing  herein  shall  exempt  the  stock- 
holders of  any  corporation  from  individual  liability  to  the 
amount  of  the  unpaid  installment  on  the  stock  owned  by  them 
or  transferred  to  them  for  the  purpose  of  defrauding  credit- 
ors; and  an  execution  against  the  corporation  to  that  extent 
may  be  levied  upon  the  private  property  of  such  individual. 

Presumption  of  Corporate  Existence. 

117.  Persons  acting  as  a  corporation  are  presumed  to  be 
corporate  until  the  contrary  is  shown ;  and  their  franchise  does 
not  become  void  until  it  is  so  declared  by  regular  legal  pro- 
ceeding; and  such  persons  sued  as  a  corporate  body  can  not 
set  up  as  a  defense  a  want  of  legal  organization. 

Appointing  Resident  Agent. 

118.  Sec.  23.  All  corporations  organized  under  this 
Chapter  shall  appoint  a  bona  fide  resident  of  this  Territory, 
who  has  been  a  resident  of  this  Territory  for  at  least  three 
years,  its  agent,  upon  whom  all  notices  and  processes,  includ- 
ing service  of  summons,  may  be  served,  and  when  so  served 
shall  be  deemed  taken  and  held  to  be  lawful  personal  service 
on  such  corporation,  and  said  notice  shall  be  filed  in  the  office 
of  the  Secretary  of  the  Territory. 

N.  B.     No  territorial  officer  can  act  as  agent. 

Filing  Instruments. 

119.  In  1903  the  legislature  changed  the  law  so  that  ar- 
ticles of  incorporation  and  all  other  documents  hitherto  filed 


AND    COEPORATION    LAW  49 

in  the  office  of  the  Secretary  of  the  Territory  shall  be  filed  in 
the  office  of  the  Territorial  Auditor. 

Fees. 

120.  Sec.  3.  Act  29  passed  1903.  The  Territorial  Audi- 
tor shall  charge  and  collect  in  advance  the  following  fees  for 
performing  the  duties  herein  required  of  him : 

Filing  articles  of  incorporation    $10.00 

Filing  affidavit  of  publication  of  articles  of  incorporation     3.00 

Filing  appointment  of  statutory  agents 3.00 

For  issuing  certificates  of  filing  of  articles  of  incorpora- 
tion         3.00 

For  copy  of  any  document  on  file  in  his  office  not  other- 

w^ise  provided  for,  per  folio 20 

For  affixing  seal  and  certificate  to  copy 1. 00 

Cause  For  Disincorporation. 

121.  Following  is  a  list  of  causes  which  work  a  dissolu- 
tion. Failure  to  appoint  a  resident  agent,  or  failure  to  file  no- 
tice of  such  appointment  with  the  Territorial  Auditor;  re- 
vocation or  attempted  revocation  of  the  appointment  of  said 
agent  without  duly  appointing  another;  disposal  of  the  cor- 
porate assets  by  a  majority  vote  of  the  outstanding  stock; 
disuse  of  franchise.  Should  any  of  these  conditions  eventuate 
the  Attorney  General  or  any  stockholder  or  officer  may  pro- 
secute and  maintain  an  action  in  any  court  in  the  Territory, 
and  procure  a  decree  of  dissolution.  Flere  again  one  of  the 
functions  of  municipal  law,  that  of  protecting  man  against 
his  fellows,  steps  in  with  the  following  proviso : 

Section  2  of  Act  82  Conceming  Dissolution 
of  Corporations. 

122.  Sec.  2.  Nothing  in  this  Act,  however,  shall  author- 
ize the  dissolution  of  a  corporation  for  any  of  the  causes  in 
this  Act  stated,  where  it  shall  be  made  to  appear  to  the  Court 
that  such  causes  or  conditions  have  been  fraudulently  pro- 
cured for  the  purpose  of  defrauding  either  creditors  or  stock- 
holders of  such  corporation. 

Bringing  Books  Into  Court. 

123.  Provision  is  made  in  the  Corporation  Act  to  compel 
the  officers  of  a  corporation  to  produce  all  books  and  records 


50  COEPOEATION  ACCOUNTING 

in  Court,  when  sufficient  cause  shall  be  shown,  in  any  suit, 
and  in  such  an  event  either  party  to  the  suit  can  make  use  of 
the  books  and  records  so  produced  as  evidence. 

Chief  Advantages. 

124.  The  Territorial  Auditor  of  Arizona  sums  up  the  chief 
advantages  of  incorporating  under  the  laws  of  Arizona  in  the 
following  language. 

125.  No  other  territory  or  state  in  the  American  Union 
offers  such  advantages  to  parties  desiring  to  incorporate  as 
does  Arizona;  its  laws  governing  corporations,  foreign  and 
domestic,  are  both  equitable  and  just,  and  lend  every  possible 
protection  to  the  stockholders  and  officials;  and  because  of 
the  explicit  wording  of  our  statutes  no  misapprehension  as 
to  their  construction  can  occur.  Among  the  many  advantages 
and  inducements  held  out  by  our  laws  to  incorporators,  the 
following  are  probably  the  most  prominent: 

"i.  Any  number  of  persons  may  organize  a  corporation 
for  the  transaction  of  any  lawful  business. 

"2.  No  director  or  stockholder  need  be  a  resident  of  Ari- 
zona, althought  a  resident  agent  must  be  maintained  to  ac- 
cept service  of  legal  process. 

"3.  Business  may  be  transacted,  and  directors'  meetings 
held  wherever  desired,  either  within  or  without  the  Territory. 

"4.  There  is  no  restriction  as  to  the  real  estate  which  the 
company  may  hold. 

''5.  Neither  the  By-Laws  nor  any  anual  report  or  state- 
ment need  be  filed  or  published. 

''6.  There  is  no  franchise  or  other  special  tax  on  corpora- 
tions. Only  corporate  property  within  the  Territory  is  taxed, 
and  the  only  local  expense  of  a  corporation  which  has  no  prop- 
erty in  Arizona  is  the  maintenance  of  a  resident  agent,  and 
the  occasional  holding  of  stockholders'  meetings  for  the  pur- 
pose of  ratifying  the  action  of  meetings  held  outside.  Such 
meetings  may  be  held  in  our  office  by  means  of  proxies  with- 
out any  of  the  stockholders  being  present  in  person. 

"7.  Incorporators  can  obtain  a  charter  on  the  same  day 
application  is  made,  and  business  may  be  transacted  imme-: 
diately  thereafter  without  waiting  for  publication  to  be  com- 
pleted. 

"8.  There  is  no  personal  liability  for  the  debts  of  a  cor- 
poration on  the  part  of  directors  or  stockholders  if  it  be  so 
stated  in  the  articles  of  incorporation. 


AND    COKPOKATION    LAW  51 

"9.  There  is  no  requirement  that  any  part  of  the  stock  be 
paid  in  at  any  particular  time. 

"10.  The  articles  of  incorporation  may  provide  for  pre- 
ferred stock,  treasury  stock  or  bonds,  when  so  desired. 

"11.  Stock  may  be  issued  full  paid  and  non-assessable  in 
exchange  for  property  or  service. 

"12.  The  capital  stock  may  be  fixed  at  any  amount  de- 
sired and  the  cost  of  incorporating  is  the  same,  no  matter 
what  amount  of  capital  stock  is  designated  in  the  articles  of 
incorporation. 

"13.  Amendments  to  articles  are  easily  made  and  at  small 
cost. 

"14.  Corporations  are  created  to  exist  twenty-five  years, 
but  this  time  may  be  renewed  at  the  end  of  that  period  by 
vote  of  the  stockholders. 

Advice  to  Incorporators. 

126.  The  following  advice  is  offered  by  the  Auditor  to 
prospective  corporators :  In  drawing  articles  of  incorpora- 
tion, care  should  be'  taken  to  observe  the  formal  requirements 
of  the  Arizona  law,  such,  for  instance,  as  stating  the  date  for 
annual  election  of  directors. 

The  agency  appointment  should  be  sent  in  as  soon  as  pos- 
sible, as  failure  to  file  the  appointment  of  a  resident  agent  for 
service  of  process  is  sufficient  cause  for  the  dissolution  of  a 
corporation.  The  by-laws  should  provide  for  voting  by  proxy 
at  stockholders'  meetings. 

In  sending  articles  of  incorporation,  a  permanent  address 
should  be  given  in  order  that  the  corporation  may  be  kept  in- 
formed as  to  matters  of  interest  occurring  in  Arizona. 

In  sending  Articles  of  Incorporation  to  the  Auditor's  of- 
fice, three  copies  besides  the  original  articles  should  be  sent. 
This  often  saves  one  or  two  days'  time  in  return  of  a  certified 
copy. 

General  Comments. 

127.  Most  of  these  advantages  have  been  discussed  in 
the  foregoing  pages  and  it  only  remains  to  call  attention  to 
the  absence  of  a  franchise  tax,  and  the  privilege  of  issuing 
various  kinds  of  stocks  and  bonds.  The  very  fact  that  stock 
may  be  paid  for  in  installments,  implies  the  power  to  levy  as- 
sessments ;  and  the  further  power  to  enforce  their  payment  in 
the  usual  manner;  but  beyond  the  par  value  of  the  stock,  as- 
sessments can  not  be  levied,  and  when  paid-up  stock  is  issued 


52  COEPORATION  ACCOUNTING 

for  services'  rendered  or  property  conveyed,  the  service  or  the 
property  shall  constitute  a  full  payment,  and  stock  so  issued 
shall  not  be  assessable.  The  failure  to  fix  a  minimum  amount 
of  capital  and  the  substitution  of  one  uniform  fee  instead  of 
a  proportionate  scale  is  a  weakness,  rather  than  an  advantage. 

Interest  Rates. 

127   (a)     The  legal  rate  of  interest  is  6%  ;  by  contract,  any 
rate.    No  days  of  grace. 


CHAPTER 


Review  of  the  General  Corporation  Laws  of  California. — 
Peculiar  Assessment  and  Liability  Features. — Advantages  Set 
Forth. — No  More  Equitable  Laws  Under  Which  to  Incorpor- 
ate.— Notes  and  Criticisms. 


128.  Many  people  cannot  distinguish  between  liberty  and 
license,  in  fact  they  continually  and  persistently  confound  the 
two  terms.  Those  people  assume  that  liberal  corporation 
laws  grant  them  the  privilege  to  do  extraordinary  acts  and 
hold  them  immune  from  the  consequences  of  these  acts.  They 
do  collectively  what  they  would  not,  and  could  not  do  indi- 
vidually, and  transcend  the  laws  of  justice  and  morality. 
Herein  lies  the  weakness  of  the  so-called  liberal  laws — a  weak- 
ness which  will  in  time  prove  fatal.  True  liberty  has  as  its 
boundary  line  that  point  where  the  rights  of  others  begin,  and 
liberal  laws,  properly  speaking,  are  those  which  recognize  and 
protect  the  rights  of  all  who  come  within  their  jurisdiction. 
In  this  sense  the  corporation  laws  of  California  are  more  lib- 
eral than  those  reviewed  in  the  preceding  chapters  and  are 
more  equitable  than  most  of  the  states.  There  are  no  better 
corporation  laws  under  which  to  organize.  They  protect  the 
creditor,  as  well  as  the  debtor,  and  in  this  the  corporation  is 
benefited  by  having  a  better  credit  standing.  In  other  words, 
they  are  fair  to  every  one,  and  no  honest  man  can  object  to 
fair  dealing.  The  right  to  participate  in  the  profits  implies 
a  duty  to  share  in  the  losses. 

129.  The  following  is  a  summary  of  these  laws  which  af- 
fect corporations  in  general : 

Minimum  Number. 

130.  Under  an  Act  approved  March  20,  1905,  three  or 
more  persons  may,  by  voluntary  association,  form  a  private 
corporation.  A  majority  of  such  persons  must  be  residents 
of  California. 


.54  COEPORATION  ACCOUNTING 

Purposes. 

131.  Corporations  may  be  formed  for  the  purpose  of 
■carrying  on  any  lawful  business  that  individuals  may  engage 
in. 

Corporate  Existence. 

132.  A  corporation  being  a  creature  of  the  law,  its  life,  as 
well  as  its  acts,  is  regulated  by  law,  hence  the  maximum  limit 
of  corporate  existence  is  fixed  at  50  years.  Corporations  may 
be  formed  to  exist  for  a  lesser  period — the  time  being  fixed  by 
the  Articles  of  Incorporation — but  such  corporations  at  any 
time  prior  to  the  expiration  of  their  charters,  may  renew  or 
extend  the  same  up  to  the  maximum  limit  of  50  years,  by  a 
vote  of  two-thirds  of  the  stock,  at  a  meeting  of  stockholders 
expressly  called  for  that  purpose  by  the  directors,  or  by  the 
written  assent  of  stockholders  holding  two-thirds  of  the  cap- 
ital stock. 

Articles  of  Incorporation. 

133.  The  articles  of  incorporation  must  set  forth : 

1.  The  name  of  the  incorporation. 

2.  The  purpose  for  which  it  is  formed. 

3.  The  place  where  its  principal  business  is  to  be  trans- 
acted. 

4.  The  term  for  which  it  is  to  exist,  not  exceeding  50  years. 

5.  The  number  of  its  directors  or  trustees,  which  shall 
not  be  less  than  three,  and  the  names  and  residences  of  those 
who  are  appointed  for  the  first  year ;  (special  provisions  apply 
to  the  directorate  of  fraternal,  benevolent,  charitable  and  so- 
cial organizations.  Provision  is  also  made  to  increase  or  di- 
minish the  number  of  directors  of  a  corporation  for  profit,  by 
a  vote  of  "a  majority  of  the  stockholders  of  the  corporation." 
.The  Act  does  not  say  a  majority  of  the  stock  in  interest,  but 
it  may  be  presumed  that  such  is  the  intention,  and  while  the 
minimum  number  of  directors  is  fixed  at  three,  it  does  not 
appear  that  the  maximum  number  has  been  fixed.) 

6.  The  amount  of  the  capital  stock  and  the  number  of 
shares  into  which  it  is  divided. 

7.  If  there  be  a  capital  stock,  the  amount  actually  sub- 
scribed and  by  whom. 

Acknowledging  Articles. 

134.  Articles  must  be  signed  and  duly  acknowledged  by 
three  or  more  persons,  a  majority  of  whom  must  be  residents 
of  California. 


AND    COEPOKATION    LAW  55^ 

134.  (a)  If  a  corporation  has  acquired  property  in  any 
county  other  than  the  county  in  which  its  principal  business 
is  located  it  must  file  a  copy  of  its  articles  of  incorporation  in 
such  county  or  counties.  Failure  to  do  so  is  fraught  with, 
severe  penalties. 

Amending  Articles. 

135.  If  articles  of  incorporation  are  found  defective  or  in- 
sufficient they  may  be  amended  by  a  vote,  or  the  written  as- 
sent, of  two-thirds  of  the  stock  in  interest.  Amended  articles 
must  be  attested  and  filed  same  as  original  articles.  The  cap- 
ital stock  can  not  be  increased  or  diminished  by  amending 
the  articles,  but  only  by  compliance  with  the  provisions  of 
the  code  applicable  thereto. 

Organization. 

136.  Corporations  must  organize  and  commence  business 
or  construction  work  within  one  year  from  date  of  incorpor- 
ation. 

Adopting  By-Laws. 

137.  A  code  of  by-laws  must  be  adopted  within  one  month 
after  filing  articles  of  incorporation.  These  by-laws  must  be 
consistent  with  the  state  laws ;  that  is  to  say,  the  by-laws  can- 
not legalize  any  act  which  the  State  laws  prohibit,  nor  can 
they  enlarge  the  powers  granted  by  the  State  laws,  and  not 
even  the  full  consent  of  all  of  the  stockholders  can  work  a 
change  in  this  respect.  A  majority  vote  of  all  the  subscribers 
is  necessary  to  the  adoption  of  by-laws  if  a  meeting  is  called 
for  that  purpose,  and  two  weeks'  notice  of  such  meeting  must 
be  given  by  advertisement;  however,  the  written  consent  of 
the  holders  of  two-thirds  of  the  subscribed  stock  is  effectual, 
and  obviates  the  necessity  of  holding  a  special  meeting. 

Provisions  of  By-Laws. 

138.  Sec.  303.  Civil  Code.  A  corporation  may,  by  its 
by-laws,  where  no  other  provision  is  specially  made,  provide 
for: 

1.  The  time,  place  and  manner  of  conducting  its  meetings 
and  may  dispense  with  notice  of  all  regular  meetings  of  stock- 
holders and  directors. 

2.  The  number  of  stockholders  or  members  constituting  a- 
quorum. 

3.  The  mode  of  voting  by  proxy. 


-56  CORPORATION  ACCOUNTING 

4.  The  qualifications  and  duties  of  directors  and  also  the 
time  of  their  annual  election,  and  the  mode  and  manner  of 
giving  notice  thereof. 

5.  The  compensation  and  duties  of  officers. 

6.  The  manner  of  election  and  tenure  of  office  of  all  of- 
ficers other  than  directors. 

7.  Suitable  penalties  for  violations  of  by-laws,  not  ex- 
ceeding, in  any  case,  one  hundred  dollars  for  any  one  offense. 

8.  The  newspaper  in  which  all  notices  of  the  meetings  of 
stockholders  or  board  of  directors,  notice  of  which  is  required, 
shall  be  published  *  *  * 

139.  These  provisions  are  not  mandatory.  They  may  be 
made  by  the  by-laws,  but  it  is  not  required  that  they  must 
be  made.  They  are  in  the  nature  of  privileges  granted,  rather 
than  duties  imposed. 

By-Laws  Certified,  Copied,  Amended,  Repealed. 

140.  The  by-laws  must  be  certified  to  by  a  majority  of 
the  directors  and  Secretary,  and  copied  into  a  book  to  be 
known  as  the  "book  of  by-laws"  and  this  book  must  be  open 
to  public  inspection.  By-laws  may  be  repealed  or  amended 
in  any  particular,  or  new  by-laws  adopted  by  a  two-thirds 
vote  of  the  subscribed  stock  at  a  meeting  called  for  that  pur- 
pose, or  by  the  written  consent  of  the  holders  of  two-thirds 
of  the  stock  without  holding  of  such  meeting;  or,  by  a  sim- 
ilar vote  the  power  to  alter  the  by-laws  as  above  may  be 
delegated  to  the  board  of  directors,  which  power  may  again 
be  revoked  by  the  same  vote.  To  be  effectual,  all  amendments 
and  repeals  must  be  stated  in  the  ''book  of  by-laws."  ''Until 
copied  or  stated  as  heretofore  required,  no  by-law,  nor  any 
amendment  or  repeal  thereof,  can  be  enforced  against  any 
person,  other  than  the  corporation,  not  having  actual  notice 
■thereof." 

141.  This  last  provision  is  intended  to  prevent  the  corpor- 
ation escaping  responsibility  for  the  failure  of  any  of  its  offi- 
cers in  neglecting  their  duty  in  this  respect. 

Directors'  Election. 

142.  Directors  must  be  elected  annually  and  if  the  by-laws 
fail  to  fix  the  date  of  election  it  must  be  held  on  the  first 
Tuesday  in  June  of  each  year. 

Powers  and  Qualifications. 

143.  The  corporate  powers  shall  be  exercised  and  the 
property  and  business  affairs  managed,  controlled,  and  con- 


AND    COEPORATION    LAW  57 

ducted  by  the  board  of  directors.*  In  business  corporations 
this  board  shall  not  consist  of  less  than  three  directors,  and 
these  directors  must  be  stockholders,  holding  at  least  so  much 
stock  as  the  by-laws  have  fixed  as  the  minimum  a  director 
may  own.  A  quorum  of  directors  is  sufficient  to  the  trans- 
action of  any  business  and  a  majority  vote  of  a  quorum  of 
directors  binds  the  corporation. 

144.  Where  the  by-laws  do  not  provide  for  the  filling  of 
vacancies  in  the  board,  such  vacancies  must  be  filled  by  the 
board  itself;  that  is,  the  board  may  not  continue  to  transact 
business  with  a  short  board,  but  must  complete  the  required 
number  by  appointment. 

Cumulative  Voting. 

145.  All  elections  must  be  by  ballot,  and  votes  may  be 
C3.st  either  in  person  or  by  proxy.  Cumulative  voting  is  per- 
mitted, and  the  right  to  cumulate  votes  can  not  be  denied. 
This  applies  to  all  corporations  electing  directors  in  this  State, 
whether  chartered  tmder  California  laws  or  other  State  laws. 
A  majority  of  the  subscribed  stock  must  be  represented  at  all 
stockholders'  meetings  where  there  is  voting  done,  otherwise 
the  meeting  must  be  adjourned  from  time  to  time  until  a  ma- 
jority of  the  subscribed  stock  is  present.  The  Secretary  must 
record  the  adjournment  and  the  reason  therefor.  To  be  en- 
titled to  vote  at  any  election  one  must  be  a  stockholder  of 
record  for  at  least  10  days  prior  to  the  election.  To  ignore 
the  above  is  to  make  void  the  election,  and  on  the  petition  of 
any  aggrieved  stockholder  the  Superior  Court  will  set  the 
same  aside. 

Minors,  Incompetents  and  Decedents. 

146.  The  stock  of  a  minor  or  an  incompetent  may  be  rep- 
resented by  a  guardian ;  of  a  deceased  person  by  an  Executor 
or  Administrator. 

Postponing  Election. 

147.  If  an  election  is  not  held  on  the  day  fixed  by  law  or 
hy  the  by-laws,  it  may  be  held  on  a  day  adjourned  to  or  or- 
dered by  the  directors,  and  if  the  directors  fail  to  hold  or  fix  a 
date  for  election,  a  meeting  may  be  called  by  the  stockholders 
for  that  purpose. 

Voting  By  Proxy. 

148.  The  legislature  of  1905  added  the  following  new  sec- 
tion to  the  code : 

*See  paragraph  73  and  foot  note  thereto. 


58  COEPOEATION   ACCOUNTINa 

Sec.  321  (b).  At  all  meetings  of  stockholders  of  corpora- 
tions organized  under  the  laws  of  this  state,  or  in  the  case  of 
corporations  having  no  capital  stock,  then  at  all  meetings  of 
the  members  of  such  corporations,  only  the  stockholders  or 
members  actually  present  shall  be  entitled  to  vote  on  any  pro- 
position, including  the  election  of  directors  and  other  officers 
of  the  corporation,  unless  proxies  for  absent  or  non-attending 
stockholders  or  members  shall  be  held  by  some  persons  pres- 
ent at  such  meeting  and  shall  be  executed  in  accordance  with 
the  provisions  of  this  Section.  Every  such  proxy  must  be  exe- 
cuted in  writing  by  the  member  or  stockholder  himself,  or  by 
his  duly  authorized  attorney.  No  proxy  heretofore  given  or 
made  shall  be  valid  after  the  expiration  of  eleven  months  from 
the  passage  of  this  act,  unless  the  member  or  stockholder  exe- 
cuting it  shall  have  specified  therein  the  length  of  time  for 
which  such  proxy  is  to  continue  in  force,  which  must  be  for  a 
limited  period,  and  in  no  case  to  exceed  seven  years  from  the 
date  of  the  execution  of  such  proxy.  No  proxy  hereafter  to  be 
given  or  made  shall  be  valid  after  the  expiration  of  eleven 
months  from  the  date  of  its  execution  unless  the  member  or 
stockholder  executing  it  shall  have  specified  therein  the  length 
of  time  for  which  such  proxy  is  to  continue  in  force,  which 
must  be  for  some  limited  period,  and  in  no  case  to  exceed 
seven  years  from  the  date  of  the  execution  of  such  proxy. 
Every  proxy  shall  be  revocable  at  the  pleasure  of  the  person 
executing  it;  but  a  corporation  having  no  capital  stock  may 
prescribe  in  its  by-laws  the  persons  who  may  act  as  proxies  for 
members,  and  the  length  of  time  for  which  such  proxies  may 
be  executed. 

Removing  Directors. 

149.  The  Board  of  Directors  may  be  removed  from  office 
by  a  vote  representing  two-thirds  of  the  stock,  such  vote  must 
be  cast  at  a  general  meeting  called  for  this  especial  purpose. 
Notice  of  such  a  meeting  must  cite  the  time,  place  and  purpose 
of  same ;  and  it  may  be  called  by  the  president,  a  majority  of 
the  directors,  or  by  stockholders  holding  one-half  the  sub- 
scribed stock.  If  the  board  is  removed  from  office  at  this  meet- 
ing a  new  board  may  be  elected  at  the  same  meeting;  but  less 
than  the  whole  board  may  not  be  removed  by  a  two-thirds 
vote — the'  reason  being  that  a  minority  of  the  stockholders 
may  be  represented  on  the  board  by  the  system  of  cumulative 
voting,  and  a  minority  representative  elected  by  one-third  of 
the  stock  should  not  be  removed  by  the  vote  of  the  other  two- 
thirds." 


AND    COEPO'RATION    LAW  59 

Dividends  From  Surplus  Only. 

150.  Directors  of  business  corporations  must  not  pay 
dividends  except  from  the  surplus  profits  of  the  business.  This 
would  imply  that  the  profits  must  first  be  ascertained  before 
a  dividend  may  be  paid,  and  that  the  inflation  of  assets  for 
the  purpose  of  creating  a  surplus  out  of  which  to  pay  divi- 
dends would  be  unlawful,  as  such  dividends  would,  in  point 
of  fact,  amount  to  a  distribution  of  the  capital,  instead  of  a 
distribution  of  the  profits  arising  from  the  business. 

Directors  Liability. 

151.  Directors  must  not  create  any  indebtedness  in  excess 
of  the  subscribed  capital,  nor  must  they  divide  or  withdraw 
any  part  of  the  capital  stock,  nor  reduce  nor  increase  the  same 
except  as  provided  for  in  the  code.  Directors  who  ignore  these 
inhibitions  shall  be  jointly  and  severally  liable  both  to  the 
corporation  and  its  creditors  to  the  full  amount  of  the  debt 
contracted,  capital  divided  or  withdrawn,  or  stock  reduced; 
and  such  liability  shall  not  outlaw.  Dissenting  directors  may 
be  relieved  by  having  their  dissent  entered  on  the  minutes  of 
the  meeting,  or  if  they  were  absent  they  shall  not  be  liable  for 
acts  committed  in  their  absence  and  without  their  knoweldge. 

152.  The  above  inhibitions  do  not  apply  when  a  corpora- 
tion in  process  of  dissolution  has  paid  all  its  debts'  and  dis- 
tributes the  remainder  of  its  capital  among  its  stockholders. 

Place  of  Meeting. 

153.  All  meetings  of  the  board  of  directors  and  of  the 
stockholders  must  be  held  at  the  principal  place  of  business 
or  office  of  the  corporation.  While  this  is  the  dictum  laid 
down  in  Section  319  of  the  Civil  Code,  it  is  believed  that  where 
the  accommodations  are  insufficient,  the  meeting,  after  it  is 
called  to  order,  may  adjourn  to  a  more  suitable  meeting  place. 

Special  Meetings. 

154.  When  the  by-laws  do  not  provide  for  regular  meet- 
ings of  the  board,  or  the  calling  of  special  meetings,  all  meet- 
ings must  be  called  by  special  notice  in  writing,  given  each 
director  by  the  Secretary  on  the  order  of  the  president,  or  in 
his  absence  on  the  order  of  two  directors. 

Stockholders  Liability. 

155.  "Each  stockholder  of  a  corporation  is  individually- 
and  personally  liable  for  such  proportion  of  all  its  debts  and. 


60  COEPOEATION  ACCOUNTING 

liabilities  contracted  or  incurred  during  the  time  he  was  a 
stockholder  as  the  amount  of  stock  or  shares  owned  by  him 
bears  to  the  whole  of  the  subscribed  capital  stock  or  shares  of 
the  corporation."  A  transfer  of  stock  does  not  relieve  the 
transferrer  from  the  liability  attached  to  his  stock  at  the  time 
of  making  the  transfer  and  suit  may  be  maintained  against  him 
for  his  proportion  of  the  corporation's  debts;  but  his  liability 
ceases  as  to  future  debts  as  soon  as  the  transfer  of  his  stock  is 
recorded;  but  it  is  important  to  him  to  see  that  the  transfer  is 
of  record  on  the  books  of  the  corporation.  "The  liability  of 
each  stockholder  of  a  corporation  formed  under  the  laws  of 
any  other  state  or  territory  of  the  United  States,  or  of  any 
foreign  country,  and  doing  business  within  this  state,  is  the 
same  as  the  liability  of  a  stockholder  of  a  corporation  created 
under  the  constitution  and  laws  of  this  state."  This 
is  in  keeping  with  the  doctrine  that  the  laws  of  a  state  do  not 
exist,  and  can  not  be  enforced  outside  its  own  domestic  terri- 
tory ;  and  no  matter  what  privileges  or  limitations  a  New  Jer- 
sey or  Delaware  corporation  is  granted  or  limted  by,  they  do 
not  apply  outside  its  own  domestic  territory. 

When  Liability  Ceases. 

156.  When  a  stockholder  transfers  his  stock  he  parts  with 
all  his  interests  in  the  company,  and  the  party  to  whom  he 
transfers  his  stock,  at  once,  or  at  least  when  the  transfer  is  re- 
recorded on  the  books  of  the  company,  becomes  a  stockholder, 
but  while  he  parts  with  all  his  interests  as  a  stockholder,  he 
does  not  part  with  all  his  responsibilities  as  such.  If  the  com- 
pany is  in  debt  at  the  time  he  transfers  his  stock,  he  is  Hable 
for  his  proportion  of  the  debt  contracted  while  he  was  a  stock- 
holder, and  no  transfer  of  stock  relieves  him  of  this  liability ;  if, 
however,  he  pays  his  proportion  of  the  debt,  he  is  relieved 
from  all  further  liability.  The  term  stockholder,  as  used  in 
Section  322  of  the  Civil  Code  of  California,  applies  not  only  to 
such  persons  as  appear  by  the  books  of  a  corporation  to  be 
such,  but  to  all  equitable  owners  of  stock  whether  or  not  they 
appear  on  the  books  of  a  corporation  as  stockholders ;  also  to 
every  person  who  purchases  stock  in  the  name  of  a  minor,  as 
long  as  such  person  remains  a  minor,  also  to  Guardians  and 
Trustees  who  voluntarily  invest  Trust  Funds  in  stocks.  Trust 
Funds  so  invested  shall  not  be  liable  to  the  provisions  of  this 
section  by  reason  of  such  investment,  nor  shall  the  person 
for  whom  the  investment  was  made,  be  liable  until  he  becomes 
competent  and  able  to  control  the  same,  the  liability  of  the 
Guardian  or  Trustee  continuing  until  that  period.  Stock  held 
as  collateral  security,  or  by  a  Trustee,  does  not  make  the 


AND    COEPOEATION    LAW  61 

holder  thereof  a  stockholder  in  the  meaning  of  this  section, 
except  as  above  provided. 

157.  The  wisdom  and  justice  of  the  above  provisions  are 
so  apparent  as  not  to  need  any  comment.  That  portion  which 
relates  to  equitable  owners  is  both  timely  and  significant.  It 
aims  a  blow  at  those  venal  and  cowardly  mortals  who  are 
willing  to  reap  the  rewards  of  success  achieved  by  others,  but 
have  not  the  courage  nor  the  honesty  to  shoulder  their  share 
of  a  failure.  Equitable  owners  are  owners  in  fact,  and  they, 
and  their  dummies,  are  liable  before  the  law. 

Issuing  Certificates. 

158.  When  stock  has  been  fully  paid  up  the  president  and 
secretary  must  issue  certificates  therefor,  or  certificates  may 
be  issued  under  restriction  and  regulation  of  the  by-laws  be- 
fore the  full  amount  is  paid  thereon,  "but  any  certificate  issued 
prior  to  full  payment  must  show  on  its  face  what  amount  has 
been  paid  thereon."  Certificates  must  not  be  issued  excepli 
for  money  paid,  service  actually  rendered  or  property  actually 
received.  Stock  issued  contrary  to  this  shall  be  void,  without 
rights  of  voting  or  dividends,  and  directors  or  officers  issuing 
it  shall  be  liable. 

Transfer  of  Stock. 

159.  With  the  exception  of  corporations  organized  for 
supplying  water  for  irrigation  or  domestic  purposes,  which 
corporations  may  provide  in  their  by-laws  that  the  shares  of 
stock  shall  be  appurtenant  to  the  land  irrigated  and  not  sep- 
arately transferable,  the  shares  of  stock  in  all  other  corpora- 
tions are  personal  property  and  may  be  transferred  by  en- 
dorsement and  delivery.  Endorsement  may  be  made  by  the 
owner,  authorized  agent,  or  attorney;  but  such  transfer  shall 
be  valid  only  as  between  the  parties  thereto  until  the  transfer 
is'  entered  on  the  books  of  the  corporation  *'so  as  to  show  the 
names  of  the  parties  by  whom  and  to  whom  transferred,  the 
number  of  the  certificate,  the  number  or  designations  of  the 
shares  and  the  date  of  transfer."*  If  the  party  receiving  stock 
by  transfer  would  acquire  full  stockholders  rights  he  must  see 
to  it  that  the  stock  is  transferred  in  his  name  on  the  books  of 
the  corporation.  If  the  party  disposing  of  his  stock  would  rid 
himself  of  responsibilities  arising  out  of  the  future  he  must  seQ 
to  it  that  his  name  is  removed  from  the  records  as  a  stock- 
holder; that  is,  he  or  his  legal  representative  should  go  to 

*See  paragraphs  260  and  261. 


62  COEPOKATION  ACCOUNTINa 

the  office  of  the  company  and  sign  the  transfer  book,  sur- 
render the  old  certificate  and  direct  the  re-issue  of  the  new. 

Married  Woman's  Rights. 

i6o.  A  married  woman  has  the  same  rights  as  a  femme 
sole  in  the  ownership,  voting  and  transfer  of  stock.  While 
this  would  be  the  logical  consequence  of  the  declaration  of 
personal  property  rights  in  the  ownership  of  corporation  stock, 
the  legislature  of  1905  emphasized  it  by  amending  section  325 
so  as  to  leave  no  room  for  doubt  on  this  subject.  A  married 
woman  can  own,  transfer,  vote  in  person  or  by  proxy,  and  re- 
ceive dividends  without  the  signature  of  her  husband. 

Must  Transfer  Stock. 

161.  If  the  officers  of  a  corporation  refuse  to  recognize  a 
transfer  and  will  not  register  the  transferee  as  a  stockholder 
on  the  books  of  the  corporation  he  may  sue  for  the  value  of  the 
stock  at  the  time  transfer  was  refused  and  obtain  judgment 
for  this  and  the  legal  rate  of  interest  (7  per  cent)  up  to  the  time 
of  settlement.  The  lawful  holder  of  stock  may  also  bring  suit 
in  the  Superior  Court  to  compel  his  recognition  as  such  by 
the  corporation ;  that  is,  the  entry  of  his  name  on  the  books  as 
a  stockholder  and  the  issuance  to  him  of  a  certificate. 

Non-Resident  Owners. 

162.  When  the  shares  of  stock  of  a  corporation  are  owned 
by  a  person  residing  outside  the  State,  the  president,  secre- 
tary or  Directors  before  making  the  transfer  on  the  books, 
may  require  from  the  attorney  or  agent  of  the  non-resident 
owner,  or  from  the  person  claiming  under  the  transfer,  an  af- 
fidavit or  other  evidence  that  said  non-resident  owner  was 
alive  at  the  time  of  the  transfer,  and  if  such  evidence  be  not 
furnished,  an  indemnity  bond  with  two  sureties  satisfactory 
to  the  officers  of  the  corporation,  or  if  not  satisfactory,  then 
one  approved  by  a  judge  of  the  Superior  Court  of  the  County 
in  which  the  principal  office  of  the  corporation  is,  conditioned 
to  protect  the  corporation  from  all  liability  in  case  the  death 
of  such  non-resident  owner  occurs  before  the  transfer  is  made,, 
and  if  such  affidavit,  or  evidence,  or  bond  be'  not  furnished, 
neither  the  corporation  nor  any  of  its  officers  shall  be  liable 
for  refusal  to  make  said  transfer. 

Records  to  Be  Kept. 

163.  Sec.  377  C.  C.  All  corporations  for  profit  are  re- 
quired to  keep  a  record  of  all  their  business  transactions;  a 


AND    CORPOEATION    LAW  63 

journal  of  all  meetings  of  their  directors,  members  or  stock- 
holders, with  the  time  and  place  of  holding  the  same,  whether 
regular  or  special,  and  if  special,  its  object,  how  authorized, 
and  the  notice  thereof  given.  The  record  must  embrace  every 
act  done  or  ordered  to  be  done;  who  were  present,  and  who 
absent;  and,  if  requested  by  any  director,  member  or  stock- 
holder, the  time  shall  be  noted  when  he  entered  the  meeting 
or  obtained  leave  of  absence  therefrom.  On  a  similar  request 
the  ayes  and  noes  must  be  given  on  any  proposition,  and  a 
record  thereof  made.  On  similar  request,  the  protest  of  any, 
director,  member  or  stockholder,  to  any  action  or  proposed 
action,  must  be  entered  in  full — all  such  records  to  be  open  to 
the  inspection  of  any  director,  member  or  stockholder,  or  cred- 
itor of  the  corporation. 

164.  This  section  is  given  in  full  because  of  its  import- 
ance. It  is  clear,  unequivocal  and  pregnant  with  timely  sug- 
gestion. It  should  be  read  over  and  over  by  those  who  are  in 
the  habit  of  calling,  conducting,  and  recording  the  proceed- 
ings of  meetings  in  an  easy-going  slip-shod  way.  It  is  essen- 
tial that  the  record  state  the  object  of  a  special  meeting, 
whether  the  meeting  was  authorized  by  the  president,  a  por- 
tion of  the  directors,  or  a  sufficiency  of  the  stockholders ;  and 
whether  the  notice  given  was  personal,  by  mail,  or  by  adver- 
tisement ;  or  whether  notice  was  waived  in  writing.  The  rec- 
ord of  those  absent  and  present  is  to  fix  responsibility  and  to 
relieve  from  liability.  The  same  is  true  of  recording  the  time 
of  entry  and  leaving  by  members  of  the  board,  of  recording 
the  ayes  and  noes  and  protests — all  of  which  are  very  impor- 
tant when  action  is  taken  involving  the  personal  liability  of 
members  of  the  board.  Directors,  stockholders  and  creditors 
should  observe  their  rights  and  duties  in  this  matter. 

165.  Sec.  378.  In  addition  to  the  records  required  to  be 
kept  by  the  preceding  section,  corporations  for  profit  must 
keep  a  book,  to  be  known  as  the  "Stock  and  Transfer  Book" 
in  which  must  be  kept  a  record  of  all  stock,  the  names  of  the 
stockholders  or  members,  alphabetically  arranged ;  instalments 
paid  or  unpaid;  assessments  levied  and  paid  or  unpaid;  a  state- 
ment of  every  alienation,  sale,  or  transfer  of  stock  made;  the 
date  thereof,  and  by  and  to  whom ;  and  all  such  records  as  the 
by-laws  prescribe.  Corporations  for  religious  and  benevo- 
lent purposes  must  provide  in  their  by-laws  for  such  records 
to  be  kept  as  may  be  necessary.  Such  ''Stock  and  Transfer: 
Book"  must  be  kept  open  to  the  inspection  of  any  stockholder, 
member  or  creditor. 


64  COEPOEATION  ACCOUNTING 

Examination  of  Corporations. 

i66.  The  Attorney  General,  or  District  Attorney,  under 
the  direction  of  the  Governor,  may  examine  into  the  affairs 
of  any  corporation,  the  results  of  such  examination  to  be  laid 
before  the  legislature  .  Right  here  is  where  the  services  of  the 
public  accountant  are  important,  both  on  account  of  his  tech- 
nical knowledge,  and  impartiality.  The  legislature  may  also 
initiate  the  examination  at  any  time,  with  powers  to  make  it 
searching  and  complete. 

Assessments. 

167.  Sec.  331  C.  C.  The  directors  of  any  corporation 
formed  or  existing  under  the  laws  of  this  State,  after  one- 
fourth  of  its  capital  stock  has  been  subscribed,  may,  for  the 
purpose  of  paying  expenses,  conducting  business,  or  paying 
debts,  levy  and  collect  assessments  upon  the  subscribed  cap- 
ital stock  thereof,  in  the  manner  and  form,  and  to  the  extent 
provided  therein. 

168.  Sec.  332.  No  one  assessment  must  exceed  ten  per 
cent  of  the  amount  of  the  capital  stock  named  in  the  articles 
of  incorporation,  except  in  the  cases  in  this  section  otherwise 
provided  for,  as  follows : 

1.  If  the  whole  capital  of  a  corporation  has  not  been  paid 
up,  and  the  corporation  is  unable  to  meet  its  liabilities  or  to 
satisfy  the  claims  of  its  creditors,  the  assessment  may  be  for 
the  full  amount  unpaid  upon  the  capital  stock;  or  if  a  less 
amount  is  sufficient,  then  it  may  be  for  such  a  percentage  as 
will  raise  that  amount. 

2.  The  directors  of  railroad  corporations  may  assess  the 
capital  stock  in  instalments  of  not  more  than  ten  per  cent  pen 
month,  unless  in  the  articles  of  corporation  it  is  otherwise  pro- 
vided. 

3.  The  directors  of  fire  or  marine  insurance  corporations 
may  assess  such  percentage  of  the  capital  stock  as  they  deem 
proper. 

169.  Sec.  333.  No  assessment  must  be  levied  while  any 
portion  of  a  previous  one  remains  unpaid ;  unless : 

1.  The  power  of  the  corporation  has  been  exercised  in 
accordance  with  the  provisions  of  this  article  for  the  purpose' 
of  collecting  such  previous  assessment; 

2.  The  collection  of  the  previous  assessment  has  beei> 
enjoined;  or 

3.  The  assessment  falls  within  the  provisions  of  either  the 
first,  second  or  third  subdivision  of  Section  332. 


AND    COEPOEATION    LAW  65 

170.  Sec.  334.  Every  order  levying  an  assessment  must 
specify  the  amount  thereof,  when,  to  whom,  and  where  pay- 
able; fix  a  day,  subsequent  to  the  full  term  of  publication  of 
the  assessment  notice,  on  which  the  unpaid  assessments  shall 
be  delinquent,  not  less  than  thirty  nor  more  than  sixty  days 
from  the  time  of  making  the  order  levying  the  assessment; 
and  a  day  for  the  sale  of  delinquent  stock,  not  less  than  fifteen 
nor  more  than  sixty  days  from  the  day  the  stock  is  declared 
delinquent. 

171.  Sec.  335.  Upon  the  making  of  the  order,  the  secre- 
tary shall  cause  to  be  published  a  notice  thereof  in  the  follow- 
ing form,  which  is  substantially  the  form  given  in  the  Code: 

Notice  of  Assessment. 

172.  The Company,  a  corporation  or- 
ganized under  the  laws  of  California,  principal  place  of  busi- 
ness or  office County,  California. 

Location  of  property County,  California. 

Notice  is  hereby  given  that  at  a  meeting  of  the  Board  of 

Directors  of  said   company,   held  on  the day  of 

I .... ,  an  assessment,  No of 

Dollars  and cents  ( )  per 

share  was  levied  upon  the  subscribed  capital  stock  of  the  said 
corporation,  pa3^able  immediately  to  the  Secretary  (or  Treas- 
urer)   at  his  office. 

California. 

Any  stock  upon  which  this  assessment  shall  remain  unpaid 

on ,1 ,  will  be  delinquent  and 

advertised  for  sale  at  public  auction,  and  unless  payment  is 

made  before,  will  be  sold  on ,1 , 

at o'clock M.,  to  pay  the  delinquent  assessment, 

together  with  costs  of  advertising  and  expenses  of  sale. 


Secretary  (Treasurer) 

Office  of  the  Company 

Dated i, 

N.  B.     This  form  is  good  in  any  State. 

173.  Sec.  336.  The  notice  must  be  personally  served  upon 
each  stockholder,  or,  in  lieu  of  personal  service,  must  be  sent 
through  the  mail,  addressed  to  each  stockholder  at  his  place 
of  residence,  if  known,  and  if  not  known,  at  the  place  where 
the  principal  office  of  the  corporation  is  situated,  and  be  pub- 
lished once  a  week,  for  four  successive  weeks,  in  some  news- 
paper of  general  circulation  and  devoted  to  the  publication  of 
general  news,  published  at  the  place  designated  in  the  articles 


66 


COEPOEATION    ACCOUNTING 


of  incorporation  as  the  principal  place  of  business,  and  also 
in  some  newspaper  published  in  the  county  in  which  the  works' 
of  the  corporation  are  situated,  if  a  paper  be  published  therein. 
If  the  works  of  the  corporation  are  not  within  a  state  or  terri- 
tory of  the  United  States,  publication  in  a  paper  of  the  place 
where  they  are  situated  is  not  necessary.  If  there  be  no  news- 
paper published  at  the  place  designated  as  the  principal  place 
of  business  of  the  corporation,  then  the  publication  must  be 
made  in  some  other  newspaper  of  the  county,  if  there  be  one, 
and  if  there  be  none,  then  in  a  newspaper  published  in  an  ad- 
joining county. 

174.  Sec.  337.  If  any  portion  of  the  assessment  mentioned 
in  the  notice  remains  unpaid  on  the  day  specified  therein  for 
declaring  the  stock  delinquent,  the  secretary  must,  unless 
otherwise  ordered  by  the  Board  of  Directors,  cause  to  be  pub- 
lished in  the  same  papers  in  which  the  notice  hereinbefore  pro- 
vided for  shall  have  been  published,  a  notice  substantially  in 
the  following  form,  which  is  the  form  outlined  by  the  Code : 

Delinquent  Sale  Notice. 

175 Company.     Principal  place 

of  business County,  California. 

Location  of  Property, County,  Cal. 

Notice. — There  is  delinquent  on  the  following  described 

stock     on     account     of     assessment     No levied     on 

,1 ,  the  several  amounts  set 

opposite  the  names  of  the  respective  shareholders  as  follows: 


Names 

No.  of 
Cert. 

No.  of 
Shares 

Amount 
Dollars             Cents 

And  in  accordance  with  law  and  an  order  of  the  Board  of 

Directors  made  on  the day  of , 

I ,  so  many  shares  of  each  parcel  of  said  stock  as  shall 

be  necessary  will  be  sold  at  public  aution  at 

on I 


AND    COEPORATION    LAW  67 

at o'clock M.,  to  pay  the  deinquent  assessment,  to- 
gether with  costs  of  advertising  and  expenses  of  sale. 
Office  of  the  Company 


Secretary  (Treasurer) 
N.  B.     This  form  also  good  in  any  state. 

176.  Sec.  338.  The  notice  must  specify  every  certificate 
of  stock,  the  number  of  shares  it  represents,  and  the  amount 
due  thereon,  except  where  the  certificates  may  not  have  been 
issued  to  parties  entitled  thereto,  in  which  case  the  number  of 
shares  it  represents,  and  the  amount  due  thereon,  except  where 
certificates  may  not  have  been  issued  to  parties  entitled  thereto, 
in  which  case  the  number  of  shares  and  amount  due  thereon, 
together  with  the  fact  that  the  certificates  for  such  shares  have 
not  been  issued,  must  be  stated. 

177.  Sec.  339.  The  notice,  when  published  in  a  daily  pa- 
per, must  be  published  for  ten  days,  excluding  Sundays  and 
holidays,  previous  to  the  day  of  sale.  When  published  in  a 
weekly  paper,  it  must  be  published  in  each  issue  for  two  weeks 
previous  to  the  day  of  sale.  The  first  publication  of  all  delin- 
quent sales  must  be  at  least  fifteen  days  prior  to  the  day  of  sale. 

178.  Sec.  340.  By  the  publication  of  the  notice,  the  cor- 
poration acquires  jurisdiction  to  sell  and  convey  a  perfect  title 
to  all  of  the  stock  described  in  the  notice  of  sale  upon  which 
any  portion  of  the  assessment  or  costs  of  advertising  remains 
unpaid  at  the  hour  appointed  for  the  sale,  but  must  sell  no 
more  of  such  stock  than  is  necessary  to  pay  the  assessments 
due  and  costs  of  sale. 

179.  Sec.  341.  Cki  the  day,  at  the  place,  and  at  the  time 
appointed  in  the  notice  of  sale,  the  secretary  must,  unless 
otherwise  ordered  by  the  directors,  sell  or  cause  to  be  sold  at 
public  auction,  to  the  highest  bidder  for  cash,  so  many  shares 
of  each  parcel  of  described  stock  as  may  be  necessary  to  pay 
the  assessment  and  charges  thereon,  according  to  the  terms 
of  sale.  If  payment  is  made  before  the  time  fixed  for  sale,  the 
party  paying  is  only  required  to  pay  the  actual  cost  of  adver- 
tising, in  addition  to  the  assessment. 

180.  Sec.  342.  The  person  offering  at  such  sale  to  pay 
the  assessment  and  cost  for  the  smallest  number  of  shares  or 
fraction  of  a  share  is  the  highest  bidder,  and  the  stock  pur- 
chased must  be  transferred  to  him  on  the  stock  books  of  the 
corporation,  on  payment  of  the  assessment  and  costs. 

181.  Sec.  343.  If,  at  the  sale  of  the  stock,  no  bidder  offers 
the  amount  of  the  assessments  and  costs  and  charges  due,  the 


68  COEPOEATION    ACCOUNTING 

same  may  be  bid  in  and  purchased  by  the  corporation,  through 
the  secretary,  president,  or  any  director  thereof,  at  the  amount 
of  the  assessments,  costs,  and  charges'  due;  and  the  amount 
of  the  assessments,  costs  and  charges  must  be  credited  as  paid 
in  full  on  the  books  of  the  corporation,  and  entry  of  the  trans- 
fer of  the  stock  to  the  corporation  must  be  made  on  the  books, 
thereof.  While  the  stock  remains  the  property  of  the  corpor- 
ation it  is  not  assessable,  nor  must  any  dividends  be  declared 
thereon;  but  all  assessments  and  dividends  must  be  appor- 
tioned upon  the  stock  held  by  the  stockholders  of  the  corpor- 
ation. 

182.  Sec.  344.  All  purchases  of  its  own  stock  made  by 
any  corporation  vest  the  legal  title  to  the  same  in  the  corpora- 
tion; and  the  stock  so  purchased  is  held  subject  to  the  control 
of  the  stockholders,  w^ho  may  make  such  disposition  of  the 
same  as  they  deem  fit,  in  accordance  with  the  by-laws  of  the 
corporation  or  vote  of  a  majority  of  all  the  remaining  shares. 
Whenever  any  portion  of  the  capital  stock  of  a  corporation  is. 
held  by  the  corporation  by  purchase,  a  majority  of  the  remain- 
ing shares  is  a  majority  of  the  stock  for  all  purposes  of  election 
or  voting  on  any  question  at  a  stockholders'  meeting. 

183.  Sec.  345.  The  dates  fixed  in  any  notice  of  assess- 
ment or  notice  of  delinquent  sale,  published  according  to  the 
provisions  hereof,  may  be  extended  from  time  to  time  for  not 
more  than  thirty  days,  by  order  of  the  directors,  entered  on  the 
records  of  the  corporation ;  but  no  order  extending  the  time  for 
the  performance  of  any  act  specified  in  any  notice  is  effectual 
unless  notice  of  such  extension  or  assessment  is  appended  to 
and  published  with  the  notice  to  which  the  order  relates. 

184.  Sec.  346.  No  assessment  is  invalidated  by  a  failure 
to  make  publication  of  the  notice  hereinbefore  provided  for^ 
nor  by  the  non-performance  of  any  act  required  in  order  to 
enforce  the  payment  of  the  same;  but  in  case  of  any  substan- 
tial error  or  omissions  in  the  course  of  proceedings  for  collec- 
tion, all  previous  proceedings,  except  the  levying  of  the  as- 
sessment are  void,  and  publication  must  be  begun  anew. 

185.  Sec.  347.  No  action  must  be  sustained  to  recover 
stock  sold  for  delinquent  assessments,  upon  the  ground  of  ir- 
regularity in  the  assessment,  irregularity  or  defect  of  the  notice 
of  sale  or  irregularity  in  the  sale,  imless  the  party  seeking  to 
maintain  such  action  first  pays  or  tenders  to  the  corporation,. 
or  the  party  holding  the  stock  sold,  the  sum  for  which  the 
same  was  sold,  together  with  all  subsequent  assessments  which 
may  have  been  paid  thereon  and  interest  on  such  sums  from 


AND    COEPORATION    LAW  69 

the  time  they  were  paid ;  and  no  such  action  must  be  sustained 
unless  the  same  is  commenced  by  the  fihng  of  a  complaint  and 
the  issuing  of  a  summons  thereon  within  six  months  after  such 
sale  was  made. 

i86.  Sec.  348.  The  publication  of  notice  required  by  this 
article  may  be  proved  by  the  affidavit  of  the  printer,  foreman, 
or  principal  clerk  of  the  newspaper  in  which  the  same  was  pub- 
lished ;  and  the  affidavit  of  the  secretary  or  auctioneer  is  prima 
facie  evidence  of  the  time  and  place  of  sale,  of  the  quantity 
and  particular  description  of  the  stock  sold,  and  to  whom,  and 
for  what  price,  and  of  the  fact  of  the  purchase  money  being 
paid.  The  affidavits  must  be  filed  in  the  office  of  the  corpora- 
tion, and  copies  of  the  same,  certified  by  the  secretary  thereof,, 
are  prima  facie  evidence  of  the  facts  therein  stated.  Certifi- 
cates, signed  by  the  secretary  and  under  the  seal  of  the  corpor- 
ation, are  prima  facie  evidence  of  the  contents  theretof. 

187.  Sec.  349.  On  the  day  specified  for  declaring  the 
stock  delinquent,  or  at  any  time  subsequent  thereto  and  before 
the  sale  of  the  delinquent  stock,  the  Board  of  Directors  may 
elect  to  waive  further  proceedings  under  this  chapter  for  the 
collection  of  delinquent  assessments,  or  any  part  or  portion 
thereof,  and  may  elect  to  proceed  by  action  to  recover  the 
amount  of  the  assessment  and  the  cost  and  expenses  already 
incurred,  or  any  part  or  portion  thereof. 

General  Corporate  Powers. 

188.  Sec.  354.     Every  corporation,  as  such,  has  power: 

1.  Of  succession  by  its  corporate  name  for  the  period  lim- 
ited; and  when  no  period  is  limited  perpetually; 

2.  To  sue  and  be  sued  in  any  court; 

3.  To  make  and  use  a  common  seal  and  alter  the  same  at 
pleasure ; 

4.  To  purchase,  hold,  and  convey  such  real  estate  and  per- 
sonal estate  as  the  purposes  of  the  corporation  may  require; 
not  exceeding  the  amount  limited  in  this  part; 

5.  To  appoint  such  subordinate  officers  and  agents  as  the. 
business  of  the  corporation  may  require,  and  to  allow  them 
suitable  compensation ; 

6.  To  make  by-laws,  not  inconsistent  with  any  existing 
law,  for  the  management  of  its  property,  the  regulation  of  its 
affairs,  and  for  the  transfer  of  its  stock ; 

7.  To  admit  stockholders  or  members,  and  to  sell  their 
stock  or  shares  for  the  payment  of  assessments  or  instalments  ,*; 

8.  To  enter  into  any  obligations  or  contracts  essential  ta- 


70  COEPOEATION    ACCOUNTING 

the  transaction  of  its  ordinary  affairs,  or  for  the  purposes  of 
the  corporation. 

189.  While  these  powers  are  extensive  they  are  all  the 
powers  granted  and  no  other  powers  may  be  assumed  except 
such  as  are  necessarily  incidental  to  the  powers  and  privileges 
so  granted. 

Increasing  Capital  Stock. 

190.  Every  corporation  may  increase  its  capital  stock  by 
a  vote  representing  at  least  two-thirds  of  the  subscribed  or 
outstanding  capital.  This  vote  must  be  had  at  a  special  meet- 
ing, authorized,  advertised,  and  noticed,  in  accordance  with 
the  provisions  of  the  Civil  Code  governing  such  increase. 

Decrease  of  Capital  Stock. 

191.  The  capital  stock  may  be  decreased  by  the  same  vote 
and  in  the  same  manner  as  an  increase  is  brought  about;  but 
in  no  case  can  the  capital  stock  be  reduced  to  a  lower  amount 
than  the  company  indebtedness. 

Bonded  Debts  and  Mortgages. 

192.  An  original  bonded  indebtedness  or  an  increase  of 
bonded  indebtedness  may  be  created  by  a  vote  representing 
two-thirds  of  the  outstanding  stock  at  a  meeting  called  exactly 
as  a  meeting  to  increase  or  decrease  stock  is  called ;  or  call  and 
publication  may  be  dispensed  with  by  the  directors  unani- 
mously passing  a  resolution,  either  at  a  regular  or  special 
meeting,  to  increase  or  decrease  the  capital  stock  or  bonded 
indebtedness,  and  the  written  assent  of  two-thirds  of  the  stock 
in  interest,  and  proper  service  of  a  copy  of  said  resolution  on 
each  and  every  stockholder  mailed  to  his  last  known  address, 
and  if  not  known,  to  the  place  where  the  principal  office  of  the 
company  is  located. 

Consolidated  Bond  Issue. 

193.  "Any  two  or  more  corporations  may  by  a  separate 
compliance,  by  each  corporation,  with  the  provisions  of  this 
section  (359)  applicable  in  the  premises  in  respect  to  creating 

■or  increasing  bonded  indebtedness ;  create  or  increase  a  con- 
solidated bonded  indebtedness  of  such  corporations,  to  be  bind- 
ing jointly  and  severally  on  such  corporations,  and  which  may 
be  secured  by  a  consolidated  mortgage  or  deed  of  trust  exe- 
cuted by  all  such  corporations,  mortgaging  or  conveying  in 


AND    COEPORATION    LAW  71: 

trust  all  or  any  of  the  properties  of  all  such  corporations,  ac- 
quired or  to  be  acquired." 

Costs  of  Incorporating. 

194.  The  cost  of  filing  articles  of  incorporation  depends 
upon  the  amount  of  capital  stock. 

The  following  is'  the  schedule  of  fees : 

Up  to  and  including  $  25,000 $15. 

Up  to  and  including       75,000 25. 

Up  to  and  including     200,000 50. 

Up  to  and  including     500,000 75. 

Up  to  and  including  1,000,000 100. 

Over  $1,000,000  an  additional  fee  of  $50  for  every  additional 
$500,000  or  fraction  thereof. 

Filing  articles  of  a  corporation  having  no  capital  stock  $5. 
Filing  articles  of  Co-operative  Associations  $15. 

For  recording  articles  of  incorporation  20  cents  per  folio 
(100  words). 

For  issuing  certificate  of  corporation  $3. 

License  Tax. 

195.  A  license  tax  of  $10  a  year  is  imposed  on  every  cor- 
poration doing  business  in  this  state,  whether  existing  or  to 
be  hereafter  created,  also  on  all  foreign  corporations.  Failure 
to  pay  this  license  by  a  domestic  corporation  will  result  in  the 
forfeiture  of  its  charter;  and  if  a  foreign  corporation  fails  to 
pay  said  license  it  shall  forfeit  its  rights  to  do  business'  in  this 
state. 

196.  This  applies  only  to  corporations  for  profit  and  does 
not  affect  educational,  religious,  charitable,  or  scientific  cor- 
porations. 

Miscellaneous  Points. 

197.  Corporations  may  change  their  name,  their  place  of 
business,  and  the  par  value  of  their  shares,  may  sell  foreign 
concessions,  may  buy  or  sell  franchises,  and  may  disincorpo- 
rate or  dissolve  before  the  expiration  of  their  charters. 

Dissolution. 

198.  Sec.  400.  Unless  other  persons  are  appointed  by  the 
Court,  the  directors  or  managers'  of  the  affairs  of  a  corporation 
at  the  time  of  its  dissolution  are  trustees  of  the  creditors  and 


72  COEPOEATION    ACCOUNTING 

Stockholders  or  members   of  the   corporation  dissolved,   and 
have  full  power  to  settle  the  affairs  of  the  corporation. 

Foreign  Corporations. 

199.  Every  foreign  corporation  must  within  40  days  after 
commencing  business  in  this  State  file  in  the  office  of  the  Sec- 
retary of  State  the  name  of  some  person  residing  within  this 
state  upon  whom  legal  process  may  be  served.  Such  filing 
entitles  a  foreign  corporation  to  the  benefit  of  the  laws  limit- 
ing the  time  for  the  commencement  of  civil  action,  and  no  such 
corporation  can  maintain  or  defend  any  action  in  any  court  un- 
til it  has  first  complied  with  the  above  provision.  A  foreign 
corporation  must  also  file  in  the  office  of  the  Secretary  of  State 
a  certified  copy  of  its  articles  of  incorporation,  or  charter,  or 
of  the  act  creating  it,  and  also  in  the  office  of  the  County  Clerk 
w^here  its  principal  business  is  transacted,  and  also  the  county 
where  it  owns  its  property.  The  fees  for  filing  the  above  cer- 
tified copies  shall  be  the  same  as  are  paid  by  domestic  cor- 
porations, and  if  the  above  filing  is  not  done  as  required  the 
ofifending  corporation  shall  be  subject  to  a  fine  of  $500  and  in 
addition  it  shall  be  debarred  of  any  rights  to  maintain  suit  or 
action  in  any  court  of  this  state. 

Review. 

200.  The  foregoing  is  a  rather  comprehensive  review  of 
the  general  corporation  laws  of  California — that  is,  the  powers', 
privileges,  restriction,  and  inhibitions  are  generic  in  their  ap- 
plication to  all  corporations.  Special  provisions  apply  to,  regu- 
late and  control  quasi-specific  corporations,  such  as  Railroad, 
Telegraph,  Street  Railway,  Water,  Gas,  Insurance,  Banking, 
Mining,  etc.  For  instance,  mining  corporations  may  establish 
agencies  outside  the  state  for  the  purpose  of  selling  and  trans- 
ferring stock.  Certain  contiguous  mining  companies  may  con- 
solidate. Railroad  companies  may  merge  or  consolidate  and 
so  on;  but  it  is  beyond  the  scope  of  this  work  to  attempt  to 
review  them  all. 

Interest  Rates. 

220  (a)  The  legal  rate  of  interest  is'  7%  ;  by  contract,  any 
rate.     No  grace  allowed.     Corporations  may  not  plead  usury. 


CHAPTER   VI. 

Details  of  Organization. — Articles  of  Incorporation  and 
By-Laws  in  Extended  Form. — Preliminary  Meeting. — Organ- 
ization Meeting. — Directors'  Meeting. — Minutes  in  Extenso. — 
Ballots,  Proxies,  Tally  Sheets,  Stock  Lists,  Subscription  Lists, 
Certificates,  Scrip  Certificates,  Contracts,  Transfer  Agents, 
Transfer  Register,  Etc.,  Etc. — Sixty-five  Important  Points 
About  Organization. 


201.  The  reader  or  student  who  has  read  the  preceding 
chapters  should  have  a  good  general  idea  of  the  nature,  scope 
and  purposes  of  a  corporation ;  and  if  he  has  any  intention  of 
forming  a  corporation  he  will  be  able  to  discriminate  in  the 
matter  of  selecting,  say  one  of  the  four  states  whose  laws  have 
been  reviewed,  under  which  to  incorporate.  H'e  will  have  ob- 
served a  great  similarity  in  some  respects,  certain  general  prin- 
ciples which  are  germane  to  all,  and  certain  other  principles 
and  policies  which  are  predominant  and  seductive  in  one  alto- 
gether missing  in  another.  He  must  work  out  his  plan  care- 
fully, with  a  view  to  the  acquiring  of  certain  privileges'  and 
the  guarding  against  certain  dangers,  and  find  out  into  which 
his  plan  will  fit  the  best.  This  is  the  desideratum !  This  the 
test  of  merit ! 

Evolving  a  Corporation. 

202.  The  idea  of  organizing  a  particular  corporation  must 
originate  with  some  one  individual — the  plan  may  be  the  pro- 
duct of  the  same  mind  or  of  several  minds ;  however,  the  man 
with  the  idea  broaches  his  proposition  to  some  of  his  friends 
whom  he  thinks  best  fitted  and  most  likely  to  join  him  and 
aid  him  in  his  enterprise.  Having  informally  discussed  the 
feasibiHty  of  the  proposed  enterprise,  whatever  it  may  be  (and 
it  can  be  any  business  that  an  individual  is  lawfully  permitted 
to  engage  in),  a  formal  meeting  is  called  for  the  purpose  of 
shaping  and  defining  the  plans  of  corporate  organization,  de- 
ciding upon  its  purposes,  choosing  directors  for  the  first  year, 
-fixing  the  amount  and  kinds  of  capital  stock,  the  number  of 


74  CORPOEATION    ACCOUNTING 

shares  into  which  it  shall  be  divided,  the  par  value  of  each,  and 
the  manner  of  payment  therefor,  all  of  which  shall  be  stated 
in  its  certificate  or  articles  of  incorporation. 

Dummy  Incorporators. 

203  (a)  Many  of  the  largest  corporations  in  the  United 
States  have  been  organized  by  dummies.  The  United  States 
Steel  Corporation  is  a  conspicuous  example.  This  plan  is 
perfectly  legal,  and  quite  frequently  it  is  necessary  as  well  as 
convenient.  Generally,  attorneys'  clerks  are  selected  for  this 
purpose.  The  least  number  of  incorporators  allowed  by  the 
law,  are  permitted  to  subscribe  for  the  smallest  number  of 
shares  necessary  to  bring  the  corporation  into  being.  The  de- 
tails of  incorporation  and  organization  are  looked  after  by  the 
lawyers,  and  when  all  the  details  are  complete,  and  the  proper 
times  arrives,  the  real  promoters  put  in  their  subscriptions, 
the  dummy  directors  resign,  transfer  their  stock  and  get  out; 
a  new  Board  of  Directors  is  elected,  and,  per  saltum,  the  lowly- 
born  corporation  takes  its  place  among  the  great  institutions 
of  the  country.  The  justification  for  this  is,  that  sometimes 
the  interested  parties  are  too  busily  engaged  in  other  matters 
to  give  the  necessary  time  to  the  preliminary  details ;  or  they 
may  be  absent;  or  for  some  reason  they  do  not  wish  it  to  be 
known  who  is  fathering  a  certain  enterprise  until  they  are 
ready  to  come  before  the  public  equipped  and  organized. 

203.  At  the  first  meeting  a  temporary  chairman  and  sec- 
retary is  chosen,  and  sometimes  a  temporary  treasurer,  to 
whom  the  incorporators  pay  a  certain  amount  each  to  defray 
the  expenses  of  incorporation,  though  this  last  step  is  not  re- 
quired by  law  in  ordinary  corporations.  A  minute  of  this 
meeting  is  kept  and  may  be  substantially  as  follows : 

Preliminary  Steps  for  Organizing  the  Gold  and  Silver 
Mining  Company. 

Fresno,  Cal.,  January  i,  1905. 

204.  Pursuant  to  mutual  understanding  and  agreement,  a 
meeting  was  this  day  held  at  1842  Tulare  street  for  the  pur- 
pose of  organizing  a  corporation  to  engage  in  gold  and  silver 
mining.  Following  are  the  names  of  the  persons  present: 
Wm.  Glass,  C.  H.  Rowell,  Geo.  Babcock,  M.  S.  Hutchison  and 
G.  W.  Lister. 

Wm.  Glass  was  chosen  as  chairman  and  C.  H.  Rowell  acted 
as  secretary. 


AND    CORPOEATION    LAW  75 

A  general  discussion  ensued  regarding  the  best  mode  of 
procedure,  the  number  and  par  value  of  the  shares,  the  prac- 
ticability of  the  proposition  and  the  prospects  of  its  success ; 
after  which  the  following  resolution  was  offered  by  Mr.  Bab- 
cock,  and  seconded  by  Mr.  Hutchison : 

Resolved,  i.  That  the  business  of  the  proposed  corpora- 
tion shall  be  to  purchase,  bond,  locate  and  operate  gold  and 
silver  mines,  and  to  do  and  engage  in  such  other  business  as 
shall  be  conducive  to  the  best  and  most  economical  operation 
of  the  same. 

2.  That  the  corporate  name  of  the  company  shall  be  "The 
Gold  and  Silver  Mining  Company." 

3.  That  its  principal  place  of  business  shall  be  at  Fresno, 
California,  and  the  location  of  its  works  and  field  of  operations 
anywhere  within  the  State. 

4.  That  the  capital  stock  shall  be  $50,000  common  stock, 
divided  into  2500  shares  of  $20  each.    Resolution  adopted. 

On  motion  of  Mr.  Babcock,  seconded  by  Mr.  Lester,  the 
chairman  was  instructed  to  have  prepared  for  a  meeting  to  be 
held  one  week  hence  a  draft  of  "Articles  of  Incorporation,"  and 
also  a  subscription  book  or  list.    Motion  carried. 

On  motion  duly  made  and  carried  the  meeting  adjourned. 

C.  H.  Rowell,  Secretary  Pro  Tern. 

Fresno,  Cal.,  January  8,  1905. 
205.  Pursuant  to  motion  made  at  last  meeting,  a  further 
meeting  was  held  this  day  for  the  purpose  of  adopting  articles' 
of  incorporation,  and  signing  the  subscription  book,  of  the 
Gold  and  Silver  Mining  Co.  The  foregoing  named  gentlemen 
were  present :  Wm.  Glass,  C.  H,  Rowell,  Geo.  Babcock,  M.  S. 
Hutchison  and  G.  W.  Lister.  Minutes  of  last  meeting  were 
read  and  approved. 

Mr.  Glass,  in  the  chair,  announced  that  acting  on  instruc- 
tions received  at  the  last  meeting  he  had  prepared  "Articles  of 
Incorporation,"  and  also  secured  a  Subscription  Book.  The 
secretary  then  read  the  "Articles  of  Incorporation,"  and  the 
same  being  satisfactory,  on  motion  of  Mr.  Hutchison,  seconded 
by  Mr.  Lister,  they  were  approved  as  read. 

The  subscription  book  was  then  signed  as  follows: 

Wm.  Glass 20  shares. 

C.  H.  Rowell 20  shares. 

Geo.  Babcock 20  shares. 

M.  S.  Hutchison 20  shares. 

G.  W.  Lister 20  shares. 

On  motion,  the  meeting  adjourned. 


76  OORPOEATION    ACCOUNTING 

206.  It  would  be  well  to  preserve  the  minutes  of  the  pre- 
liminary meetings  as  a  part  of  the  records  of  the  company, 
though  their  preservation  is  not  necessary  after  a  permanent 
organization  is  effected  and  the  company  commences  business 
under  its  charter.  It  would  be  advisable  not  to  have  these 
minutes  appear  in  the  regular  minute  book  of  the  corporation, 
after  its  organization. 

What  Articles  of  Incorporation  Must  Contain. 

I.     The  name  of  the  corporation. 
•  2.     The  purpose  for  which  it  is  formed. 

3.  The  location  of  its  principal  office  or  the  place  where 
its  principal  business  is'  to  be  transacted. 

4.  The  term  for  which  it  is  to  exist  if  not  perpetual. 

5.  The  number  and  classification  of  its  directors  (where 
there  is  more  than  one  class),  together  with  the  names,  and 
residences  of  those  who  are  appointed  for  the  first  year. 

6.  The  amount  and  kinds  of  the  capital  stock  (if  more 
than  one  kind),  and  the  number  of  shares  into  which  it  is  di- 
vided. 

7.  If  there  is  a  capital  stock,  the  amount  actually  sub- 
scribed and  by  whom. 

8.  The  names  of  the  incorporators  and  the  amount  of  their 
subscriptions,  etc. 

208.  There  are  many  other  things  that  articles  of  incor- 
poration may  contain,  as  previously  pointed  out,  if  they  are 
to  form  part  of  the  corporation's  powers  and  privileges. 

Specimen  Forms  of  Articles. 

209.  Following  is  a  copy  of  articles  of  incorporation  which 
suggest  the  form  and  scope  of  such  an  instrument.  They  are 
specific  in  form  but  general  in  character,  and  while  many 
things  are  omitted  that  might  be  included  under  the  New  Jer- 
sey provision  for  instance,  they  may  serve  as  a  basis  for  a  more 
enlarged  and  modified  form  conformative  to  the  requirements 
and  purposes  of  any  ordinary  corporation — this  is  all  that  is 
aimed  at.  For  varied  forms  see  "The  New  Secretary's  Manual 
by  W.  A.  Carney."  For  New  Jersey  forms,  see  "Dill  on  New 
Jersey  Corporations." 

Articles  of  the  Gold  and  Silver  Mining  Company. 

210.  Know  all  men  by  these  presents,  that  we,  the  under- 
signed, have  this  day  voluntarily  associated  ourselves  together 


AND    GORPOEATION    LAW  77 

for  the  purpose  of  forming  a  corporation,  under  the  laws  of 
the  State  of  California ;  and  we  do  hereby  certify ; 

First :  That  the  name  of  the  corporation  is  the  "Gold  and 
Silver  Mining  Company;" 

Second:  That  the  purposes  for  which  it  is  formed  are: 
to  mine,  own,  possess,  develop,  buy,  sell  and  lease  mines  and 
mining  property ;  to  mill  and  reduce  ores,  either  by  milling  or 
smelting,  clorination,  cyanide  process,  or  otherwise,  from  the 
mines  owned  or  operated  by  this  company,  or  for  others ;  to 
locate. and  acquire  by  purchase  water-rights  for  the  purpose 
of  using  same,  or  the  sale  of  water;  to  engage  in  hotel  and 
boarding-house  business  at  or  in  the  vicinity  of  mines  owned 
or  operated  by  this  company.  To  own  by  purchase  or  other- 
wise, lands  or  real  estate  and  to  sell  the  same.  To  buy  and  sell 
machinery  and  chattels,  such  as  may  be  used  by  the  company 
in  or  about  its  mines  and  to  carry  on  the  business  of  mining 
for  gold  and  silver  in  the  State  of  California. 

Third :  The  place  where  its  principal  business  is  to  be 
transacted  shall  be  the  City  of  Fresno,  in  the  County  of  Fresno, 
State  of  California. 

Fourth :  The  term  for  which  it  is  to  exist  is  fifty  (50) 
years  from  and  after  the  date  of  its  incorporation. 

Fifth:  The  number  of  directors  shall  be  five  (5),  and  the 
names  and  residences  of  those  who  are  appointed  for  the  first 
years  are  Wm.  Glass,  who  resides  in  the  City  of  Fresno, 
County  of  Fresno,  State  of  California;  C.  H.  Rowell,  who  re- 
sides in  the  City  of  Fresno,  County  of  Fresno,  State  of  Cali- 
fornia; Geo.  Babcock,  who  resides  in  the  City  of  Fresno, 
County  of  Fresno,  State  of  California ;  M.  S.  Hutchison,  who 
resides  in  the  City  of  Fresno,  County  of  Fresno,  State  of  Cali- 
fornia, and  G.  W.  Lister,  who  resides  in  the  City  of  Fresno, 
County  of  Fresno,  State  of  California. 

Sixth :  The  amount  of  capital  stock  of  said  corporation  is 
fifty  thousand  dollars  ($50,000),  divided  into  two  thousand 
five  hundred  shares  common  stock  of  the  par  value  of  twenty 
dollars  ($20)  each. 

Seventh :  That  the  amount  of  said  capital  stock,  which 
has  been  actually  subscribed  is  one  hundred  (100)  shares,  of 
the  par  value  of  twenty  dollars  ($20)  per  share,  and  the  fol- 
lowing are  the  names  of  the  persons  by  whom  the  same  has 
been  subscribed,  to-wit :  William  Glass,  twenty  (20)  shares ; 
C.  H.  Rowell,  twenty  (20)  shares ;  Geo.  Babcock,  twenty  (20) 
shares;  M.  S.  Hutchison,  twenty  (20)  shares;  G.  W.  Lister, 
twenty  (20)  shares. 


78  COEPORATION   ACCOUNTING 

Eighth :  The  stock  of  said  corporation  subscribed  for  by 
any  person  or  persons  paying  coin  for  same,  shall  be  paid  for 
in  the  manner  following,  to-wit:  One  dollar  ($i)  per  share  on 
the  first  day  of  each  calendar  month  until  the  whole  is  paid. 

Ninth:  Any  person  or  persons  failing  to  pay  any  instal- 
ment upon  the  subscription  price  of  any  of  the  shares  of  the 
capital  stock  of  said  corporation,  when  the  same  becomes  due 
and  delinquent  under  these  articles  of  incorporation,  and  the 
by-laws  of  the  corporation,  to  be  hereafter  adopted,  shall  im- 
mediately forfeit  and  lose  all  of  said  shares  of  stock  and  sums 
previously  paid  thereon,  and  shall  receive  (50)  per  cent  paid 
up  stock  for  the  amounts  previously  paid  by  them. 

Tenth :  The  Board  of  Directors,  or  a  majority  of  them, 
acting  by  resolution  in  their  official  capacity  on  behalf  of  this 
corporation,  shall  have  power  to  exercise  all  the  functions  and 
powers  granted  to  a  corporation  organized  under  the  laws  of 
this  State,  and  their  acts  as  such  shall  be  corporate  Acts ;  pro- 
vided however  that  their  authority  may  be  limited  and  de- 
fined by  the  by-laws  to  be  hereafter  adopted. 

In  witness  whereof,  we  have  hereunto  set  our  hands  and 
seals  this  8th  day  of  January,  1905. 

WILLIAM  GLASS,  (Seal) 
C.  H.  ROWELL,  (Seal) 

GEO.  BABCOCK,  (Seal) 
M.  S.  HUTCHISON,  (Seal) 
G.  W.  LISTER,  (Seal) 

STATE  OF  CALIFORNIA,    ) 

County  of  Fresno,  \  ^^' 

On  this  1st  day  of  February  in  the  year  of  our  Lord,  one 
thousand,  nine  hundred  and  five,  before  me,  L.  J.  Colmore,  a 
notary  public  in  and  for  the  County  of  Fresno,  State  of  Cali- 
fornia, residing  therein,  duly  commissioned  and  sworn,  per- 
sonally appeared  William  Glass,  C.  H.  Rowell,  Geo.  Babcock, 
M.  S.  Hutchison  and  G.  W.  Lister,  personally  known  to  me  to 
be  the  persons  whose  names  are  subscribed  to  the  within  and 
foregoing  instrument  and  they  and  each  of  them  duly  acknowl- 
edged to  me  that  he  executed  the  same. 

In  witness  whereof,  I  have  hereunto  set  my  hand  and  af- 
fixed my  official  seal  the  day  and  year  in  this  certificate  first 
above  written. 

(Seal)     L.  J.  COLMORE, 
Notary  Public  in  and  for  the   County  of   Fresno,   State  of 
California. 


AND    CORPOEATION    LAW  79 

211.  Great  care  and  forethought  should  be  exercised  in 
drawing  up  the  articles  of  incorporation,  for  the  corporation 
is  authorized  to  do  only  such  acts,  and  engage  in  such  business, 
as  may  bet  set  forth  in  its  articles  of  incorporation.*  It  is  there- 
fore wise  to  enumerate  every  line  of  business  that  it  is  thought 
probable  the  corporation  may  wish  to  engage  in  at  some  future 
time.  For  instance,  the  foregoing  articles  do  not  allow  the 
company  named  therein  to  engage  in  the  grocery  business, 
nor  the  fruit  business,  either  on  its  own  account  or  in  partner- 
ship, for  be  it  understood  that  a  corporation  can  form  a  part- 
nership with  an  individual,  who  may  or  may  not  be  a  stock- 
holder, provided  its  articles  of  incorporation  permit  it  to  do 
so.  In  such  a  case,  each  are  liable  for  the  debts  of  the  part- 
nership business,  same  as  in  any  ordinary  co-partnership;  but 
neither  party  is  liable  for  the  debts  of  the  other  outside  the 
debts  of  the  particular  branch  of  business  in  which  they  are 
partners ;  e.  g.,  if  they  are  in  partnership  in  the  cattle  business, 
the  corporation  is  not  liable  for  the  partner's  debts  in  any 
other  business  he  may  be  engaged  in  on  his  own  account; 
neither  is  the  partner  liable  for  any  of  the  debts  of  the  corpor- 
ation incurred  in  its  mining  business". 

Consolidations. 

212.  A  corporation  may  not  legally  consolidate  with  an- 
other corporation  unless  the  power  of  consolidation  is  given 
to  it  in  its  charter.  If  there  should  be  even  a  remote  possi- 
bility of  a  corporation  desiring  to  merge  its  interests  with  that 
of  another  corporation,  provision  should  be  made  for  such  a 
contingency  in  its  articles  of  incorporation.  The  subject  of 
consolidation  and  mergers  from  an  accounting  standpoint  will 
be  described  and  illustrated  further  on  in  this  work.  Sufficient 
has  been  said  to  make  it  clear  that  the  instrument  of  incorpora- 
tion is  a  very  important  one,  and  that  it  is  wise  to  enumerate 
extensive  powers  in  the  ''Articles  of  Incorporation." 

Amended   Articles   of  Incorporation. 

213.  If  it  should  be  subsequently  discovered  that  the  ar- 
ticles of  incorporation  are  defective  or  incomplete,  they  may 
be  amended,  usually,  by  vote  of  the  board  of  directors',  or  by 
vote  or  the  written  assent  of  the  stockholders,  as  the  articles 
themselves  may  provide  in  consistence  with  the  State  Law. 

*The  exception  to  this  rule  is  the  State  of  Maine.  A  Maine  corpora- 
tion can  do  not  only  what  the  statute  expressly  grants  but  also  what  it 
does  not  forbid. 


80  CORPORATION    ACCOUNTING 

Articles  Subscribed  and  Acknowledged. 

214.  All  articles  of  incorporation  must  be  subscribed  and 
acknowledged  before  some  one  competent  to  administer  an 
oath.  The  least  number  of  signatures  depends  upon  the  mini- 
mum fixed  by  the  laws  of  the  State  under  which  the  corpora- 
tion is  chartered.  California  requires  three — a  majority  of 
whom  must  be  residents  of  the  State ;  New  Jersey  three — one 
of  whom  must  be  a  resident  of  the  State,  and  Arizona  provides 
for  any  number — none  of  whom  need  be  residents. 

Filing  of  Articles  of  Certificates. 

215.  Upon  filing  the  articles  or  certificate  of  incorporation 
in  the  office  of  the  County  Clerk,  or  some  kindred  office,  of  the 
county  in  which  the  principal  business  or  office  of  the  com- 
pany is  to  be  transacted  or  located  and  a  certified  copy  thereof 
in  the  office  of  the  Secretary  of  State,  the  Secretary  of  State 
must  issue  to  the  corporation,  over  the  great  seal  of  the  State, 
a  certificate  that  a  copy  of  the  articles  or  certificate  of  incor- 
poration has  been  filed  in  his  office,  and  thereupon  the  persons 
signing  the  articles,  and  their  associates  and  successors  shall 
be  a  body  politic  and  corporate. 

216.  A  corporation  doing  business  in  more  than  one 
county  must  file  its  articles  in  every  county  in  which  it  does' 
business,  and  the  State  usually  fixes  a  limited  time  in  which 
business  must  be  commenced. 

Extending  and  Dissolving  Corporate  Existence. 

217.  Corporations  may  renew  or  extend  their  charters, 
may  disincorporate  or  dissolve,  either  voluntarily  or  involun- 
tarily, by  regular  process  of  law ;  but  when  it  comes  to  taking 
a  step  like  this,  the  advice  of  a  lawyer  is  better  than  tnat  of  an 
accountant,  and  it  is  strongly  recommended  that  in  such  cases, 
as  well  as  in  all  cases  where  doubt  exists,  or  money  or  prop- 
erty is'  at  stake,  that  the  directors  seek  the  advice  and  acquire 
the  services  of  a  competent  attorney.  It  may  be  said  right 
here,  very  emphatically,  that  it  is  not  the  purpose  of  this  work 
to  usurp  the  functions  of  the  lawyers,  nor  to  define  with  un- 
erring certainty  the  more  or  less  abstruse  meaning  of  legal 
phraseology;  but  rather  to  enable  the  corporation  accountant 
or  officer  to  deal  intelligently,  and  in  a  business-like  manner, 
with  all  matters  pertaining  to  the  welfare  of  the  corporation, 
from  either  a  legal,  ethical,  or  accounting  standpoint.  The 
literal  and  apparently  obvious  meaning  of  the  codes  frequently 


AND    COEPOEATION    LAW  81 

varies  with  the  judicial  interpretation  of  the  same,  and  statute 
law  is  a  very  mutable  thing;  therefore  it  is  the  highest  form 
of  economy,  in  most  cases,  to  employ  counsel  whose  business 
it  is  to  keep  up  with  the  changes  in  the  law,  and  informed  on 
decisions  of  the  Courts. 

Permanent  Organization. 

218.  Preliminary  organization  having  been  efifected,  the 
next  step  is  permanent  organization.  Having  fixed  a  day,  by 
resolution,  at  the  last  preliminary  meeting  for  organizing,  or 
having  mutually  agreed  upon  a  day,  and  selected  some  one  to 
draw  up  a  code  of  by-laws  for  the  government  of  the  corpora- 
tion, the  temporary  chairman  calls  a  meeting  of  all  of  the 
stockholders  named  in  the  articles  of  incorporation  for  the  pur- 
pose of  effecting  a  permanent  organization  and  adopting  a 
code  of  by-laws. 

MINUTE  BOOK  OF  THE  GOLD  AND  SILVER  MINING 

COMPANY. 

Meeting  of  the  persons  named  as  directors  in  the  articles  of 
incorporation  of  the  Gold  and  Silver  Mining  Company. 

Pursuant  to  notice,  duly  given,  a  meeting  of  the  persons 
named  as  directors  in  the  articles  of  incorporation  of  the  Gold 
and  Silver  Mining  Company  was  held  this  ist  day  of  January, 
1905,  at  I  o'clock  p.  m.,  at  1842  Tulare  street,  Fresno,  Cali- 
fornia. 

At  this  meeting  all  of  the  persons  so  named  were  present, 
viz :  Wm.  Glass',  M.  S.  Hutchison,  C.  H.  Rowell,  G.  W.  Lister, 
Geo.  Babcock. 

Mr.  Glass  was  called  to  the  chair,  and  Mr.  Rowell  was  re- 
quested to  act  as  temporary  secretary. 

Mr.  Glass  in  the  chair  announced  that  the  certificate  of  in- 
corporation of  this  company  having  been  duly  issued  from  the 
office  of  the  Secretary  of  State  of  California,  the  object  of  the 
meeting  was  to  organize  the  company  and  the  board  of  direc- 
tors by  the  election  of  officers,  as  required  by  law. 

Mr.  Babcock  nominated  Mr.  Glass  for  President.  No  other 
nominations  being  made,  on  motion  of  Mr.  Babcock,  seconded 
by  Mr.  Lister,  the  ballot  was  dispensed  with  and  Mr.  Glass 
was  unanimously  elected  president  and  thereupon  took  his 
seat  as  president  of  the  company  and  of  the  board  of  directors. 

(Follow  the  same  form  for  the  election  of  vice-president, 
secretary  and  treasurer.) 


82  CORPORATION    ACOOUNTING 

Mr nominated 

for  legal  adviser  of  the  company  at  a  retainer  of 

Dollars    per    year,    payable    quarterly.      On    motion    of    Mr. 

seconded  by  Mr 

the  ballot  was  dispensed  with  and  Mr i was 

declared  unanimously  elected  legal  adviser  of  the  company  at 
a  salary  of  $ per  year. 

The  president  then  suggested,  that  as  the  stockholders  or 
subscribers  for  stock  were  present,  further  proceedings  be  sus- 
pended and  a  meeting  of  the  stockholders  be  called  and  held 
forthwith. 

On  motion,  duly  made  and  seconded,  it  was  unanimously 

Resolved :  That  a  meeting  of  the  stockholders  of  the  com- 
pany be,  and  it  is  hereby  called  to  be  held  this day 

of 1905,  at  the  hour  of o'clock.  . .  .m., 

at  the  place  fixed  as  the  office  of  the  company, 

California. 

On  motion,  duly  seconded,  the  meeting  adjourned. 

President. 

Attest. 
,  Secretary. 

220.  First  stockholders'  meeting  of  the  Gold  and  Silver 
Mining  Company. 

We,  the  undersigned,  the  stockholders  and  subscribers  for 

stock  of  the Company, 

being  the  owners  and  holders  of  all  the  subscribed 
capital  stock  of  said  company,  viz :    William  Glass  20  shares 

shares shares 

shares shares 

shares',   do  hereby   give  our  written 

consent  to  the  holding  of  this  the  first  stockholders'  meeting 

of Company,  the day 

of 1905J  at  the  hour  of o'clock .  . .  m.,  at 

the    place    determined    on    as    the    office    of    the    company, 

County,  California,  and  we  do 

hereby  certify  that  all  the  stockholders  and  subscribers  for 
stock  of  said  company  are  at  this  meeting  now  here  present. 

In  witness  whereof,  we  have  hereunto  subscribed  our 
names  this day  of ,  A.  D.  1905. 


AND    COKPORATION    LAW  83 

Pursuant  to  a  call  and  notice  duly  made  and  given,  and  the 
above  written  consent,  this,  the  first  meeting  of  the  stock- 
holders of  the .^ Company,  was  held 

on  this day  of * A.  D.  1905,  at  the 

hour  of o'clock.  . .  .m.,  at  the  place  determined  on  as  the' 

office  of  the  company, California. 

Present:  One  hundred  shares,  owned,  held  and  repre- 
sented as  follows,  viz :  Wm.  Glass  20  shares, 

shares, shares, 

shares, shares, 

shares,  being  all  the  shares  of  the  subscribed  capital  stock  of 
the  company. 

Mr ,  president,  in  the  chair. 

The  secretary  read  the  minutes  of  the  meeting  of  the  per- 
sons named  as  directors  in  the  articles  of  incorporation,  which, 
on  motion,  duly  seconded,  were  approved. 

The  president  announced  that  the  first  business  of  the 
meeting  was  the  adoption  of  a  code  of  by-laws  for  the  govern- 
ment of  the  company  and  its  officers. 

Mr presented  a  code  of  by-laws 

which  were   read  by  the   secretary,   and  on   motion   of   Mr. 

,  seconded  by  Mr 

they  were  adopted  and  ordered  engrossed  in  the  company's 
"book  of  by-laws. 

There  being  no  further  business  before  the  stockholders, 
on  motion,  the  meeting  adjourned. 

President. 

Attest : 

Secretary. 

Directors'  Meeting  Held  on  the Day  of 

A,  D.  1905. 

221.     Mr in  the  chair.  The'  secretary 

read  the  minutes  of  the  previous  meeting  of  the  board,  held 
for  the  purpose  of  organizing,  and  on  motion  duly  made  and 
carried  the  minutes  were  approved  as  read. 

The  secretary  next  read  the  by-laws  as  the  same  are  en- 
grossed  on    pages to inclusive   of   the    company's 

book  of  by-laws. 

The  following  resolution  was  offered  by  Mr 

and  seconded  by  Mr and  carried  unani- 
mously. 

Resolved,  that  the  code  of  by-laws  adopted  by  the  stock- 
holders at  their  first  meeting  and  engrossed  on  the  book  of 
by-laws,  pages  i  to inclusive,  be,  and  the  same  are  here- 
by adopted  as  the  by-laws  of  this  company  and  further : 


84  CORPORATION    ACCOUNTING 

Resolved:  That  each  member  of  the  Board  of  Directors 
and  the  Secretary  be,  and  they  are  hereby  requested  to  sub- 
scribe their  names  to  the  said  by-laws,  and  to  certify  the  same 
in  that  book  to  be  kept  in  the  office  of  the  company  and  known 

as,  and  called  the  "Book  of  By-Laws"  of  the 

Company. 

On  motion  duly  seconded  it  was  unanimously 

Resolved;     That  the  office  of  the  company  be,  and  it  is 

hereby  fixed  and  located  at ,  in  the  City 

of  Fresno,  County  of  Fresno,  State  of  California. 

On  motion,  duly  seconded,  it  was 

Resolved;  That  the  secretary  be,  and  he  is  hereby  in- 
structed and  directed  to  procure  blank  certificates  of  stock 
for  the  use  of  the  company,  and  also  a  seal  with  the  following 
impress : 

Company,  Fresno,  California. 

Incorporated ,  1905. 

The'  articles  of  assignment  of  the 

mine  to  the  company,  were  then  read  by  the  secretary  and  on 
motion,  duly  seconded,  were  ratified. 

Moved    by    Mr ,    and    seconded    by 

Mr ,  that  Edgar  L.  Hamilton  be,  and  he 

is    hereby    appointed    Superintendent,    at  a  salary  of  $150  a 
month. 

There  being  no  further  business  before  the  directors,  the 
meeting  adjourned. 

C.  H.  Rowell,  Secretary. 

By-Laws  of  the  Gold  and  Silver  Mining  Company. 

Article  I. 

222.  The  name  of  this  corporation  is  The  Gold  and  Sil- 
ver Mining  Company. 

Article  II. 

The  corporate  powers  of  this  company  shall  be  vested  in  a 
board  of  five  (5)  directors. 

Article  III. 

The  officers  of  this  company  shall  be  a  president,  vice-pres- 
ident, secretary  and  treasurer. 

Article  IV. 

On  the  first  Monday  following  the  first  Tuesday  in  Janu- 
ary of  each  year  a  meeting  of  the  stockholders  shall  be  held. 


AND    COEPOEATION    LAW  85- 

at  which  the  directors  of  the  corporation  shall  be  elected  by- 
ballot,  to  serve  one  year  from  and  after  their  election,  and  un- 
til the  election  of  their  successors.  None  but  stockholders  of. 
record  shall  be  entitled  to  vote  at  any  election,  and  the  trans- 
fer books  of  the  company  shall  be  closed  not  less  than  ten  days 
prior  to  annual  election.  Votes  may  be  cast  either  in  person, 
or  by  proxy  and  cumulative  voting  shall  be  permitted. 

Article  V. 

The  annual  meeting  of  the  stockholders  shall  be  called  by 
a  notice  to  be  published  in  a  daily  newspaper  published  in 
the  City  of  Fresno,  State  of  California,  once  a  week  for  four 
weeks,  and  it  shall  be  the  duty  of  the  secretary  to  notify  the 
stockholders  of  record  whose  addresses  are  known,  by  mail,, 
of  the  date  of  such  meeting,  at  least  ten  days  prior  thereto. 

Article  VI. 

Vacancies  in  the  Board  of  Directors  shall  be  filled  by  the 
other  directors  in  office,  and  such  persons  shall  hold  office  un- 
til the  first  annual  meeting,  after  their  election,  or  until  their 
successors  are  elected  and  qualify. 

Article  VII. 

The  Board  of  Directors  shall  have  power  to  call  meetings- 
of  the  stockholders  when  they  deem  it  necessary,  and  they 
shall  call  a  meeting  at  any  time  upon  the  written  request  of 
stockholders  holding  one-third  of  the  subscribed  capital  vStock, 
giving  such  notice  of  the  call  meetings  as  the  exigencies  of  the 
case  may  require.  They  shall  also  appoint  and  remove,  at 
pleasure,  all  officers,  agents  and  employees  of  the  company; 
prescribe  their  duties,  fix  their  compensation,  any  may  require 
from  them  security  for  their  faithful  services  when  they  deem 
it  necessary. 

Article  VIII. 

It  shall  be  the  duty  of  the  directors  to  cause  to  be  kept  a 
complete  record  of  all  their  acts  and  proceedings  and  a  com- 
plete record  of  all  the  acts  and  proceedings  of  all  meetings  of 
the  stockholders.  They  shall  cause  to  be  made  at  every  regu- 
lar meeting  of  the  stockholders,  a  full  statement,  showing  in 
full  and  in  detail  the  assets  and  liabilities  of  the  company,  and 
generally  the  condition  of  its  affairs.  A  simliar  statement 
shall  be  presented  at  any  other  meeting  of  the  stockholders, 
when  requested  by  persons  holding  at  least  one-third  of  the 
subscribed  capital  stock  of  the  company.  They  shall  declare 
dividends  out  of  the  surplus  profits,  whenever  in  their  opinion 
such  profits  and  the  interests  of  the    company    warrant    the 


.86  COEPOEATION    ACCOUNTING 

same.  Such  dividends  shall  be  declared  only  on  the  stock  that 
has  actually  been  subscribed;  but  the  unsold  stock  shall  not 
participate  therein.  They  shall  supervise  all  officers  and  see 
that  their  duties  are  properly  performed.  They  shall  cause  to 
be  issued  to  subscribers  contracts  for  certificates  of  stock,  and 
when  any  subscribed  stock  has  been  fully  paid  for,  they  shall 
cause  to  be  issued  to  stockholders,  certificates  of  stock,  which 
shall  be  in  substance  and  form  as  prescribed  in  these  by-laws. 

Article  IX. 

The  Board  of  Directors  shall  elect  one  of  their  number  to 
act  as  president,  and  one  to  act  as  vice-president;  in  case  of 
the  inability  of  the  president,  or  his  absence  from  the  principal 
place  of  business  of  the  corporation,  the  vice-president  shall, 
during  such  inability  or  absence,  be  vested  with  all  the  powers 
and  duties  of  the  president.  The  president  shall  preside  at  all 
meetings  of  the  stockholders,  and  of  the  directors,  and  shall 
have  the  casting  vote.  He  shall  sign  all  contracts  and  instru- 
ments of  writing,  which  have  first  been  approved  by  the  Board 
of  Directors.  He  shall  call  special  meetings  of  the  Board 
of  Directors  and  special  meetings  of  the  stockholders  when- 
ever he  deems  it  for  the  interest  of  the  company  to  do  so,  and 
he  shall  discharge  such  other  duties  as  may  be  required  of  him 
by  law  and  the  by-laws  of  this  company.  It  is  to  be  distinctly 
understood  and  is  hereby  made  a  part  of  these  by-laws  that  in 
case  of  a  tie  vote,  the  mere  decision  of  the  president  (that  is, 
the  announcement  of  the  result),  shall  constitute  his  affirma- 
tive or  negative  vote. 

Article  X. 

It  shall  be  the  duty  of  the  treasurer  to  safely  keep  all  of  the 
money  of  the  company,  and  to  disburse  the  same  under  the 
•direction  of  the  directors,  and  in  conformtiy  to  these  by-laws. 
At  the  regular  meeting  of  the  stockholders  in  January,  he  shall 
submit  to  the  meeting  a  full  and  complete  statement  of  his 
accounts,  with  proper  vouchers  for  all  disbursements,  and  he 
shall  make  such  statements,  when  required  by  the  president, 
or  any  three  members  of  the  Board  of  Directors,  to  any  meet- 
ing of  the  stockholders  or  Board  of  Directors.  He  shall  make 
no  payments,  except  on  a  warrant  drawn  by  the  president  and 
countersigned  by  the  secretary.  He  shall  perform  such  other 
duties  as  pertain  to  his  office  and  as  are  perscribed  by  the 
Board  of  Directors. 

Article  XI. 

It  shall  be  the  duty  of  the  secretary  to  keep  a  record  of  the 
/proceedings  of  the  Board  of  Directors  and  of  stockholders. 


AND    CORPORATION    LAW  87 

He  shall  keep  a  book  of  blank  contracts  for  certificates  of 
stock,  fill  up  and  countersign  all  contracts  for,  and  certificates 
of  stock  issued,  and  make  the  corresponding  entries  in  such 
books  of  such  issuance.  He  shall  keep  a  stock  ledger,  in  debit 
and  credit  form,  showing  the  number  of  shares  issued  to  and 
transferred  to  any  stockholder,  and  the  date  of  such  issuance 
and  transfer.  He  shall  discharge  such  other  duties  as  are  or 
may  be  prescribed  by  the  Board  of  Directors,  not  inconsistent 
with  law  or  these  by-laws. 

Article  XII. 

A  general  superintendent  shall  be  elected  by  the  Board  of 
Directors,  at  such  time  as  they  deem  proper,  removable  at  their 
pleasure.  He  shall  make  full  returns  to  the  Board  of  Directors- 
of  all  persons  hired  or  employed  at  its  mines,  or  in  the  mills 
of  the  corporation,  and  their  wages,  and  a  statement  of  all  ex-- 
penditures,  as  often  as  the  board  may  require,  with  the  neces- 
sary vouchers,  duplicates  of  which  he  will  keep,  and  a  similar- 
statement  of  ore  extracted,  and  report  the  general  condition 
of  the  mining  work  and  the  affairs  of  the  company  which  are 
under  his  supervision.  Should  he  require  funds  he  shall  make 
a  requisition  on  the  Board  of  Directors  therefor,  stating  the 
precise  object  for  which  they  are  desired  and  the  amount;  if 
approved  by  the  Board  of  Directors,  the  money  shall  be  trans- 
mitted to  him  in  such  manner  as  they  may  direct. 

Article  XIII. 

The  sum  of  twelve  hundred  ($1200)  dollars  per  annum,  and 
no  more,  shall  be  allowed  to  the  entire  Board  of  Directors  for 
traveling  and  incidental  expenses,  and  the  members  of  the 
Board  of  Directors  shall  receive  no  other  compensation  what- 
ever for  their  services  as  such  board  until  the  company  is  put 
on  a  sound  dividend-paying  basis,  after  which  they  shall  re- 
ceive $10  each  for  every  directors'  meeting  attended;  but  this 
shall  in  no  case  apply  to  any  director  who  is  a  salaried  officer 
of  the  company;  provided,  however,  that  in  case  the  Board  of 
Directors  shall  at  any  time  be  increased  from  five  to  seven,  a 
pro  rata  amount  shall  be  allowed  for  the  necessary  incidental 
expeness  of  the  additional  directors. 

Article  XIV. 

No  contract  by  any  officer  of  the  company,  other  than  for 
work  and  labor  performed  and  materials  furnished,  of  more 
than  one  hundred  ($100)  dollars,  shall  be  valid  without  the 
previous  approval  or  subsequent  ratification  of  the  Board  of 
Directors. 


,88  CORPOEATION    ACCOUNTING 

Article  XV. 

The  capital  stock  of  this  company  shall  be  fifty  thousand 
dollars  ($50,000.00),  divided  into  two  thousand  five  hundred 
shares  (2500),  of  the  par  value  of  twenty  dollars  ($20)  each. 
All  stock  shall  be  held  and  owned  by  the  subscribers  and 
transferees  thereof,  subject  to  the  conditions  contained  in 
.these  by-laws.  Stock  shall  be  paid  for  in  the  manner  follow- 
ing, to-wit :  One  dollar  per  share  on  application  and  one  dol- 
lar per  share  on  the  first  of  each  and  every  calendar  month 
thereafter  until  the  whole  amount  is  paid;  but  for  full  cash 
payments  at  the  time  of  subscription  a  discount  of  ten  (10) 
per  cent  shall  be  allowed,  and  for  cash  payments  for  ten 
months  in  advance  a  discount  of  six  (6)  per  cent  shall  be  al- 
lowed. All  owners  of  shares  and  of  contracts  for  certificates, 
.whether  original  subscribers  or  transferees  thereof,  who  fail 
and  neglect  to  pay  any  instalment  upon  the  subscription  price 
thereof,  during  the  whole  of  the  calendar  month,  upon  the 
first  day  of  which  such  instalment  becomes  due  and  payable, 
shall  thereupon  be  immediately  notified  by  the  secretary  that 
such  instalment  is  due  and  payable,  and  if  the  same  is  not  paid 
within  thirty  days  from  and  after  the  date  of  such  notice,  the 
.secretary  shall,  immediately  after  the  lapse  of  such  thirty  days 
from  the  time  of  such  notice,  issue  to  the  owner  a  certificate 
of  fully  paid  up  shares  to  the  amount  of  fifty  (50)  per  cent  of 
all  money  paid  in  upon  the  shares,  (but  no  fractional  certifi- 
cate will  be  issued  for  the  same)  upon  which  the  instalment 
so  remains  unpaid,  and  such  owner  shall  forfeit  all  right,  title, 
interest  and  ownership  in,  to  and  of  the  shares  upon  which 
the  instalment  upon  the  subscription  price  is  due  and  unpaid, 
and  also  of,  in  and  to  all  money  previously  paid  upon  the  sub- 
scripiton  price  of  such  shares. 

After  two  thousand  (2,000)  shares  of  the  capital  stock  of 
the  corporation  shall  have  been  subscribed  for,  the  Board  of 
Directors  may,  at  any  time  in  their  discretion,  suspend  and 
prohibit  further  subscription  to  said  capital  stock,  and  in  like 
manner  limit  the  number  of  shares  that  may  be  subscribed  for 
within  any  designated  period,  or  until  the  further  order  of  the' 
iDoard. 

Article  XVI. 

Certificates  of  stock  and  contracts  for  such  certificates  of 
stock  shall  be  of  such  form,  wording  and  device  as  shall  be 
ordered  by  the  Board  of  Directors,  subject  to  the  provisions 
of  the  by-laws.  When  any  of  the  capital  stock  of  this  corpor- 
ation shall  be  subscribed  for,  and  the  first  instalment  of  the 
•subscription  price  is  paid,  there  shall  be  delivered  to  the  sub- 


AND    CORPOEATION    LAW  89 

scriber  a  contract  in  the  name  of  the  corporation,  signed  by 
the  president  and  secretary,  whereby  this  corporation  shall 
bind  itself  to  issue  to  such  subscriber  a  certificate  for  such 
stock  when  the  subscription  price  thereof  is  paid;  and  such 
contract  shall  express  upon  its  face  that  the  stock  is  owned 
subject  to  the  conditions  contained  in  the  by-laws  of  this  cor- 
poration, and  all  of  the  provisions  of  Article  XV  of  these  by- 
laws relating  to  the  par  value  of  such  stock,  the  instalments 
in  which  the  price  thereof  is  to  be  paid,  the  failure  to  pay  any 
instalments,  the  notice  to  the  owner  and  forfeiture  of  stock, 
shall  be  expressed  in  said  contract  and  made  a  part  thereof. 

Article  XVII. 

All  transfers  of  stock  shall  be  made  either  in  person  or  by 
power  of  attorney.  When  made  by  attorney  the  party  mak- 
ing the  transfer  must  exhibit  to  the  secretary  and  file  in  his 
office,  as  evidence  of  his  authority,  a  certified  copy  of  his 
power  of  "Attorney  in  fact";  provided  however,  that  if  the 
owner  and  holder  of  the  stock  shall  fill  in  a  power  of  attorney 
printed  on  back  of  certificate,  designating  the  party  offering 
his  stock  for  transfer  or  any  officer  of  the  company  as  his  at- 
torney to  make  transfer,  no  further  evidence  of  authority  shall 
be  required. 

Article  XVIIL 

The  Board  of  Directors  shall  meet  in  regular  session,  at 
the  office  of  the  corporation  in  the  City  of  Fresno,  State  of 
California,  on  the  last  Saturday  of  each  month.  Special  meet- 
ings of  the  Board  of  Directors  may  be  called  by  the  president, 
or  any  three  members  of  the  board,  for  any  time,  upon  written 
personal  notice  to  all  of  the  directors,  of  the  time  and  place 
of  such  meeting,  or  by  depositing  such  written  notice  in  the 
United  States  postoffice,  addressed  to  the  directors  at  their 
residence,  at  least  one  week  before  the  date  of  holding  such 
meeting.  Three  members  shall  constitute  a  quorum  of  the 
Board  of  Directors  at  all  meetings  of  the  board,  but  a  major- 
ity of  all  the  members  of  the  board  shall  be  necessary  to  make 
or  pass  any  order,  direction  or  resolution. 

Article  XIX. 

The  company  shall  cause  to  be  printed  and  sent  each  share- 
holder, semi-anually,  a  circular  giving  a  full  and  detailed  ac- 
count of  the  assets  and  liabilities,  and  generally  the  condition 
of  its  affairs,  together  with  a  statement  of  its  development 
work  to  date,  giving  number  of  tons  of  ore  extracted  and  num- 
ber of  tons  of  ore  milled,  etc.,  together  with  a  statement  of  all 
work  done  up  to  the  time  of  the  issuance  of  the  circular,  giv- 


90  COEPOEATION    ACCOUNTING 

ing  the  name  of  the  mine  or  mines  in  possession  of  the  com- 
pany, whether  held  by  bond  or  purchase,  and  their  condition 
at  that  time. 

Article  XX. 
The  directors  may,  in  their  discretion,  set  aside  from  the 
profits  of  each  year  before  declaring  dividends  a  certain  per- 
centage of  the  profits  to  be  determined  by  themselves  for  the 
purpose  of  creating  a  fund  to  develop  new  properties,  or  for 
reserve  or  contingent  purposes ;  provided  that  in  no  case  shall 
the  amount  set  aside  for  any  one  year  exceed  twenty-five  per 
cent  of  the  net  profits  for  that  year. 

Article  XXI. 

These  by-laws  may  be  appealed  or  amended  or  new  by- 
laws may  be  adopted  at  the  annual  meeting  of  the  stockhold- 
ers, or  at  any  other  meeting  of  the  stockholders  called  for  that 
purpose  by  the  Board  of  Directors,  by  a  vote  representing 
two-thirds  of  the  subscribed  capital  stock.  The  written  con- 
sent of  the  holders  of  two-thirds  of  the  subscribed  capital 
stock  shall  be  effectual  to  repeal  or  amend  any  by-laws  or  to 
adopt  additional  by-laws. 

Article  XXII. 

The  order  of  business  at  all  meetings  of  the  Board  of  Di- 
rectors shall  be  as  follows : 

1.  Roll  call. 

2.  Reading  of  the  minutes  of  previous  meeting. 

3.  Reports  of  (a)  secretary  (b)  treasurer. 

4.  Reports  of  committees,  (a)  regular  (b)  special. 

5.  Unfinished  business. 

6.  New  business. 

7.  Adjournment. 

Article  XXIII. 

All  disputes  arising  out  of  parliamentary  questions  shall  be 
settled  by  Robert  Rules  of  Order, 

We,  the  undersigned,  do  hereby  ceritfy  that  we  are  all  of 
the  directors,  and  all  of  the  stockholders  of  the  Gold  and  Sil- 
ver Mining  Company,  and  that  the  above  and  foregoing  by- 
laws consisting  of  twenty-three  (23)  articles,  have  this  day 
been  adopted  by  us  as  the  by-laws  of  such  corporation. 

In  witness  whereof,  we  have  hereunto  signed  our  names 
this day  of IQ^S- 


AND    COEPOEATION    LAW  91. 

I, ,  secretary  of  the 

Company,  a  corporation,  do  hereby  certify  that  the  above  and 
foregoing  by-laws  are  the  by-laws  of  the  said  corporation  duly 
adopted  and  assented  to  by  all  of  the  holders  of  the  capital 

stock  of  said  corporation,  on  the day  of , 

A.  D.  1905. 


223.  The  foregoing  set  of  by-laws  while  designed  for  a 
particular  class  of  corporation  contain  all  the  usual  require- 
ments of  by-laws,  and  may,  with  certain  modifications  and 
changes,  be  made  to  meet  the  requirements  of  any  business. 
The'  provisions  made  in  article  fifteen  for  forfeiture  of  stock 
is  made  in  the  interest  of  the  company.  It  is  not  made  to  re- 
lieve the  stockholder  from  the  obligation  of  his  subscription 
but  rather  to  release  the  stock  to  the  company  for  the  purpose 
of  being  resold. 

A  Short  Form  of  By-Laws  for  a  Close  Corporation. 

By-Laws  of  the 

Co. 

Article  I. 

224.  The  name  of  this  corporation  is  the 

Company. 

Article  II. 

Sec.  I.  The  corporate  powers  of  this  company  shall  be 
vested  in  a  board  of  five  (5)  directors,  three  of  whom  shall 
constitute  a  quorum  for  the  transaction  of  any  business ;  but 
a  majority  of  the  board  shall  be  necessary  to  pass  any  resolu- 
tion. 

Sec.  2.  The  power  so  vested  in  this  board  may  at  any  time 
be  delegated  by  a  unanimous  vote  of  the  Board  to  any  one  of 
their  number  with  the  designation  of  "Manager"  and  his  acts 
shall  be  corporate  acts  and  binding  on  this  company  except  as 
hereinafter  provided  in  these  by-laws. 

Article  III. 

The  officers  of  this  company  shall  be  a  president,  vice-pres- 
ident, secretary  and  treasurer,  all  of  whom  must  be  stockhold- 
ers of  this  company,  with  the  exception  of  the  treasurer. 

Article  IV. 

It  shall  be  the  duty  of  the  president  to  preside  at  all  meet- 
ings of  the  stockholders  and  of  the  Board  of  Directors,  to  sign 
all  certificates  of  stock  and  all  legal  instruments  executed  by 


92  CORPORATION    ACCOUNTING 

this  corporation,  and  such  other  and  further  things  as  these 
by-laws  may  hereinafter  provide.  In  his  absence  or  inability 
these  duties  shall  devolve  on  and  be  exercised  by  the  vice- 
president. 

Article  V. 

It  shall  be  the  duty  of  the  secretary  to  keep  a  faithful  rec- 
ord of  all  meetings  of  the  stockholders  and  of  the  board  of  di- 
rectors, to  countersign  all  certificates  of  stock  and  all  legal  in- 
struments and  affix  the  official  seal  thereto ;  he  shall  also  keep 
a  stock  ledger  and  journal  showing  the  names  of  stockholders 
and  number  of  shares  held  by  each  and  do  such  other  things 
as  the  board  of  directors  may  direct.  He  shall  immediately 
notify  the  treasurer  of  any  change  in  the  authority  of  persons 
hitherto  authorized  to  sign  checks  or  drafts. 

Article  VI. 

It  shall  be  the  duty  of  the  treasurer  to  keep  a  faithful  rec- 
ord of  all  monies  coming  into  his  (or  its)  possession  and  to 
disburse  the  same  only  on  the  order  of  the  person  or  persons 
authorized  to  make  drafts  on  the  treasurer  by  these  by-laws, 
or  by  resolution  of  the  board ;  provided  that  the  treasurer  shall 
be  relieved  from  responsibility  for  the  failure  of  the  secretary 
to  notify  him  (or  it)  of  any  change  in  the  person  or  persons 
theretofore  authorized  to  draw  checks  or  drafts. 

Article  VII. 

Sec.  I.  The  annual  meeting  of  stockholders  after  the  first 
meeting,  shall  be  held  on  the  first  Monday  following  the  first 
Tuesday  in  January  of  each  year.  At  this  meeting  a  board 
of  directors  shall  be  elected  to  serve  for  the  ensuing  year.  All 
•elections  shall  be  by  ballot,  and  votes  may  be  cast  in  person 
or  by  proxy.  Two-thirds  of  the  stock  in  interest  shall  con- 
stitute a  quorum  of  stockholders. 

Sec.  2.  No  publication  of  stockholders'  meetings  shall  be 
necessary,  but  the  secretary  shall  be  required  to  serve  notice 
either  in  person,  or  by  mail,  on  every  stockholder  at  least  five 
days  prior  to  the  annual  meeting. 

Article  VIII. 

Vacancies  in  the  board  of  directors  shall  be  filled  by  vote 
of  the  remaining  directors  in  office. 

Article  IX. 

The  board  of  directors  shall  elect  from  their  number  one 
who  shall  act  as  manager  to  serve  at  the  pleasure  of  the  board, 
and  he  shall  be  clothed  with  all  the  authority  necessary  for 


AND    CORPOEATION   LAW  93 

the  efficient  management  of  the  business,  except  as  herein- 
after provided.  He  shall  be  empowered  to  contract  for  and 
purchase  all  goods,  wares  and  merchandise  handled  by  this 
company;  to  sell  and  fix  prices  on  same;  to  sign  checks  or 
drafts  against  funds  in  the  hands  of  the  treasurer;  to  borrow 
money  and  negotiate  notes  therefor  in  the  name  of  this  com- 
pany to  an  amount  not  exceeding  $1000  dollars;  to  employ 
such  agents,  clerks  and  servants  as  in  his  judgment  the  best 
interest  of  the  business  demand;  to  fix  their  salaries  and  dis- 
charge them  at  will,  and  to  perform  such  other  duties,  and 
exercise  such  other  powers,  as  usually  belong  to  the  office  of 
manager ;  provided  that  in  no  case  shall  he  enter  into  any  con- 
tract in  a  greater  sum  than  $1000  without  the'  previous  ap- 
proval of  the  board  of  directors. 

Article  X. 

All  the  foregoing  powers  shall,  in  the  absence,  sickness,  or 
inability  of  the  manager,  be  vested  in  and  exercised  by  the' 
president;  but  they  are  not  to  be  regarded  as  co-ordinate  or 
co-extensive  powers ;  and  in  case  of  the  death  or  removal  of 
the  manager  a  successor  must  be  elected  within  one  month. 

Article  XI. 

Certificates  of  stock  shall  be  of  such  form,  wording,  and 
device  as  the  secretary,  with  the  approval  of  the  board  of  di- 
rectors, may  select. 

Article  XII. 

The  official  corporate  seal  shall  bear  the  following  legend 

Company,  Incorporated 

1905- 

Article  XIII. 

No  transfers  shall  be  valid  between  the  transferee  and  this 
company  until  the  same  shall  have  been  recorded  on  the  books 
of  this  company;  and  it  is  agreed  between  the  subscribers  to 
these  by-laws,  that  no  stockholder  shall  transfer  his  stock  nor 
any  part  thereof  to  any  one  outside  the  corporation  without 
first  having  offered  his  stock  at  a  meeting  of  the 
Board  of  Directors,  for  an  amount  not  exceeding  the 
highest  bona  fide  offer  made  for  his  stock ;  providing  that  this 
shall  not  be  construed  as  absolutely  restraining  a  stockholder 
from  selling  his  shares. 

Article  XIV. 

These  by-laws  may  be  repealed  or  amended  or  new  by-laws 
adopted  at  any  annual  meeting  of  the  stockholders,  or  at  any 


94  COKPOEATION    ACCOUNTING 

special  meeting  called  for  that  purpose,  provided  that  a  writ- 
ten or  printed  notice  of  such  meeting  shall  be  mailed  to  each 
stockholder  at  his  last  known  address  at  least  lo  days  before 
said  meeting. 

Article  XV. 

We,    the   undersigned,   being   all   of   the   stockholders   of 

the Company,    do    hereby    certify 

that  we  know  the  contents  and  meaning  of  the  foregoing  15 
articles,  that  we  assent  to  every  statement  and  proposition' 
therein  contained,  and  that  the  same  have  this  day  been 
adopted  by  us  as  the  by-laws  and  governing  code  of  this  cor- 
poration. 

In  witness  whereof  we  have  hereunto  signed  our  names 
this day   of IQOS- 


Attest : 

Secretary. 

Provisions  of  By-Laws. 

225.  Following  is  a  list  of  the  general  provisions  of  all 
by-laws;  and  if  the  student  or  organizer  will  read  them  over 
carefully  and  note  how  they  are  applied  and  worked  out  in  the 
foregoing  sets  of  by-laws,  he  may,  with  the  exercise  of  care 
and  discretion,  construct  a  code  of  laws  for  the  government 
of  any  ordinary  corporation. 

The  by-laws  of  a  corporation  may,  subject  to  state  laws, 
provide  for. 

1.  The  time,  place  and  manner  of  conducting  the  meet- 
ings, and  may  dispense  with  notice  of  all  regular  meetings  of 
stockholders  or  directors ; 

2.  The  number  of  stockholders  or  members  constituting 
a  quorum ; 

3.  The  mode  of  voting  by  proxy  ; 

4.  The  qualifications  and  classification  of  directors,  the 
time  of  their  annual  meeting  and  manner  of  giving  notice 
thereof ; 

5.  The  compensation  and  duties  of  officers; 

6.  The  manner  of  election,  and  the  terms  of  office  of  all 
officers  other  than  directors  ; 

7.  Suitable  penalties  for  violation  of  by-laws,  not  exceed- 
ing in  any  case  the  maximum  fixed  by  law  (in  California  $100. 
In  New  Jersey  $20.) 


AND    COEPORATION    LAW  95 

8.  The  newspaper  in  which  all  required  notices  of  meet- 
ings of  stockholders  or  directors  shall  be  published. 

9.  The  manner  of  filling  vacancies  among  directors  or  of- 
ficers ; 

10.  The  manner  of  transferring  stock  and  the  regulations 
governing  the  same ; 

11.  The  duties  of  directors  and  officers  and  whether  they 
shall  be  under  bonds; 

12.  The  declaration  of  dividends; 

13.  The  manner  in  which  the  by-laws  may  be  repealed  or 
amended. 

Adopting  By-Laws. 

226.  The  by-laws  must  be  consistent  with  the  constitution 
and  laws  of  the  State  and  must  be  assented  to  by  those  hold- 
ing a  majority  of  the  subscribed  capital  stock,  or  a  majority 
of  the  members  if  there  is  no  capital  stock,  at  a  meeting  called 
for  that  purpose,  due  notice  of  which  must  be  given,  or  they 
may  be  adopted  by  the  written  assent  of  the  holders  of  two- 
thirds  of  the  capital  stock,  or  two-thirds  of  the  members  if 
there  is  no  capital  stock,  without  the  necessity  of  holding  a 
special  meeting — they  are  usually  prepared  in  advance  and 
adopted  at  the  first  stockholders'  meeting.  Some  states  per- 
mit the  granting  of  this  power  to  the  directors,  subject  to  re- 
vision by  the  stockholders. 

California  Provisions. 

22y.     The  following  provisions  apply  to  California. 

All  by-laws  adopted  must  be  certified  by  a  majority  of  the 
directors  and  secretary,  and  copied  in  a  legible  hand  into  a 
book  to  be  known  as  the  "Book  of  By-Laws,"  which  book 
shall  be  open  to  public  inspection  during  office  hours  of  each 
day,  except  holidays. 

No  by-law  shall  take  effect,  and  no  subsequent  amend- 
ment shall  take  effect,  until  copied  in  said  book. 

By-laws  may  be  repealed  or  amended,  or  new  by-laws 
adopted  at  an  annual  meeting,  or  a  meeting  called  for  that 
purpose,  by  a  vote  of  two-thirds  of  the  stock,  and  by  written 
assent  of  the  holders  of  two-thirds  of  the  stock  or  two-thirds 
of  the  members  where  there  is  no  capital  stock. 

Directors  must  be  elected  annually  by  the  stockholders  or 
members,  and  such  election  must  be  held  on  the  first  Tuesday 
in  June  of  each  year,  unless  otherwise  provided  in  the  by- 
laws ;  but  if  from  any  cause  directors  are  not  elected  annually, 
it  is  not  to  be  supposed  that  the  corporation  is  without  di- 


96  COEPOEATION    ACCOUNTING 

rectors  or  officers.  The  directors  in  all  cases  hold  office  until 
their  successors  are  elected. 

All  elections  must  be  by  ballot,  and  every  stockholder  has 
the  right  to  vote  in  person,  or  by  proxy,  the  number  of  shares 
standing  in  his  name  on  the  corporation's  books. 

Every  stockholder  is  entitled  to  a  vote  for  each  share  of 
stock  that  he  holds,  and  can  cast  so  many  votes  for  as  many 
persons  as  there  are  directors  to  be  elected,  or  he  may  cumu- 
late all  his  votes  on  one  candidate,  that  is  to  say,  if  he  has 
ten  shares  of  stock  and  there  are  five  directors  to  be  elected, 
he  can  multiply  his  shares  by  five  and  cast  fifty  votes  for  one 
person;  or  he  may  give  twenty-five  each  to  two  persons,  or 
distribute  his  fifty  votes  among  as  many,  and  in  such  propor- 
tion as  he  may  choose.  If  there  is  no  capital  stock  the  mem- 
ber has  as  many  votes  as  there  are  directors  to  be  chosen, 
which  he  can  distribute  in  the  manner  outlined  above. 

The  last  three  paragraphs,  with  slight  modifications  apply 
to  New  Jersey,  Delaware,  Arizona  and  other  States. 

Form  of  Proxy. 

228.  The  by-laws  provide  for  the  form  of  proxy,  which 
shall  be  either  a  parol,  or  written  proxy. 

228.  (a)  By  a  "Parol"  is  meant  an  oral  declaration,  or 
word  of  mouth,  or  writing  without  seal.  The  usual  form  is 
the  written  proxy.  A  special  and  a  general  form  are  herewith 
presented. 

Special  Proxy  or  Power  of  Attorney. 

229.  Know  all  men  by  these  presents:  That  I,  J.  J. 
Rahill,  do  hereby  constitute  and  appoint  Walter  Shoemaker 
my  true  and  lawful  attorney,  for  me  and  in  my  name,  place 
and  stead,  to  vote  as  my  proxy  at  the  annual  meeting  of  the 
stockholders  of  the  Gold  and  Silver  Mining  Company,  a  cor- 
poration, and  at  any  adjournment  of  said  meeting,  all  of  the 
twenty  shares  of  the  capital  stock  of  said  corporation  now 
standing  on  its  books  in  my  name,  as  fully  and  amply  as  I 
could  or  might  do  were  I  personally  present;  with  full  power 
of  substitution  and  revocation. 

Witness  my  hand  and  seal  at  Fresno,  California,  this 

day  of A.  D.  1905. 

J.  J.  Rahill,    (Seal) 

230.  The  reader  will  notice,  that  the  above  form  gives  to 
the  person  holding  the  proxy  the  power  to  substitute  another 
proxy,  and  also  asserts  the  stockholder's  right  to  revoke  either 
or  both  appointees,  if  he  should  change  his  mind,  or  decide  to 
be  present  in  person. 


AND    CORPORATION    LAW  97 

What  a  Proxy  Indicates. 

231.  The  giving  of  a  proxy  indicates  the  stockholder's  de- 
sire to  be  represented,  and  the  power  of  substitution  is  logical 
and  sometimes  necessary  to  further  this  desire ;  but  this  proxy 
power  is  contingent  on  the  absence  of  the  stockholder,  hence 
the  revocation  clause  by  which  the  delegated  power  returns 
to  him  who  gave  it  and  reposes  absolutely  in  the  stockholder. 

General  Proxy  or  Power  of  Attorney. 

232.  Know  all  men  by  these  presents :  That  I,  J.  J.  Rahill 
of  Fresno,  in  the  County  of  Fresno,  State  of  California,  have 
constituted  and  appointed,  and  by  these  presents  do  consti- 
tute and  appoint  Walter  Shoemaker  of  Fresno,  California,  my 
true  and  lawful  attorney,  for  me  and  in  my  name,  place  and 
stead,  for  the  following  purposes,  to-wit : 

First:  To  vote,  as  my  proxy  during  the  term  ending  on 
January  i,  1906,  at  all  regular  meetings  and  adjournments 
thereof,  and  at  all  special  meetings  and  adojurnments  thereof, 
of  the  stockholders  of  the  Gold  and  Silver  Mining  Company, 
a  corporation  of  the  State  of  California,  having  its  principal 
place  of  business  at  Fresno,  Cal.,  all  of  the  twenty  shares  of 
the  capital  stock  of  said  corporation  standing  on  the  books 
of  said  corporation  in  my  name. 

Second :  To  consent  to,  and  sign  in  writing,  all  records 
or  papers  of  said  corporation,  or  any  proposition  whatever,  in 
which  or  to  which  my  assent  and  signature  as  such  stockholder 
may  be  requisite,  or  proper,  or  conformatory  to  the  by-laws 
of  said  corporation. 

Third:  I  hereby  grant  unto  my  said  attorney  full  power 
and  authority  to  do  and  perform  every  act  and  thing  whatso- 
ever requisite  and  necessary  to  be  done  in  the  premises,  as 
fully,  to  all  intents  and  purposes,  as  I  might,  or  could  do,  if 
personally  present ;  with  full  power  of  substitution  and  revo- 
cation ;  and  I  hereby  ratify  and  confirm  all  that  my  said  at- 
torney, or  his  substitute  or  substitutes,  shall  lawfully  do,  or 
cause  to  be  done,  by  virtue  of  these  presents. 

It  witness  whereof,  I  have  hereunto  set  my  hand  and  seal 

this  first  day  of A.  D.  1905. 

J.J.  Rahill,    (Seal) 

233.  It  will  be  seen  that  the  proxy  or  agent  in  the  above 
instrument  is  made  the  legal  representative  of  the  stockholder, 
with  all  his  rights,  privileges  and  prerogatives,  for  a  given 
period  of  time;  but  as  in  the  former  j)roxy,  that  authority  can 
be  revoked  at  any  time  the  stockholder  chooses. 


98 


COEPOEATIOlSr    ACCOUNTING 

Ballots. 


Form  of  ballots,  one  executed  by  a  stockholder  and  one  by 
a  proxy : 


234.       Ballot. 

Election  for  Directors  of  the 

Gold  and  Silver  Mining  Co. 

Five  to  be  Elected. 

October  i,  1905. 
Wm.     Glass,    holding    20 
shares,  votes  said  20  shares 
for 

William  Glass 20  votes 

C.  H.  Rowell 20  votes 

Geo.  Babcock 20  votes 

M.  S.  Hutchison. . .  .20  votes 

G.  W.  Lister 20  votes 

to  serve  as  directors  of  said 
corporation  for  the  year  be- 
ginning this  1st  day  of  Oc- 
tober, 1905,  and  until  their 
successors  in  office  are  duly 
elected  and  qualified  or  ap- 
pointed. 

Wm.  Glass. 


235. 


Ballot. 


Election  for  Directors  of  the 

Gold  and  Silver  Mining  Co. 

Five  to  be  Elected. 

October  i,  1905. 
Geo.  Babcock,  holding  20 
shares   (by  his  proxy  M.  S. 
Hutchison)     votes    said    20 
shares  for 

Geo.  Babcock 40  votes 

M.  S.  Hutchison.  . .  .40  votes 

G.  W.  Lister 20  votes 

to  serve  as  directors  of  said 
corporation  for  the  year  be- 
ginning this  1st  day  of  Oc- 
tober, 1905,  and  until  their 
successors  in  office  are  duly 
elected  and  qualified  or  ap- 
pointed. 

Geo.  Babcock, 
By  his  proxy  M.  S.  Hutchi- 
son. 


Proxy  and  Cumulative  Voting. 

236.  The  above  forms  illustrate  both  the  proxy  and  cu- 
mulative method  of  voting.  In  each  of  the  above  a  total  of 
100  votes  is  cast ;  in  one  case  the  distribution  of  these  votes  is 
an  equal  distribution  among  five,  and  in  the  other  case  an 
unequal  distribution  among  three. 

List  of  Stockholders. 

237.  Before  the  time  set  for  the  meeting  of  stockholders, 
the  secretary  prepares  a  roll  or  list  of  the  stockholders  with 
the  names  and  numbers  of  shares  held  by  each.  This  may,  or 
may  not  be  the  list  of  stockholders  required  by  some  States  to 
be  prepared  ten  days  in  advance  of  election  for  the  purpose  of 
inspection  by  the  stockholders,  which  purpose  has  been  pre- 
viously explained.  The  following  form  will  be  found  conve- 
nient for  election  purposes. 


238. 


AND    CORPOEATION  .  LAW 
Roll  Call. 


99 


Names  of 
Stockholders 

Shares 

Present 

In  Person 

Shares 

Present 

By  Proxy 

Names  of 
Stockholders 

Shares 

Present 

In  Person 

Shares 
Present 
By  Proxy 

Forward^ 

TotH  shs.present 

239.  The  by-laws  regulate  the  number  of  shares,  or  mem- 
bers, that  shall  constitute  a  quorum  of  stockholders.  If  a 
quorum  is  present  a  meeting  must  be  held;  if  not  it  must  be 
adjourned  from  time  to  time,  until  the  necessary  number  be 
present  either  in  person  or  by  proxy. 


240. 


Tally  Sheet. 


Candidates  for  Directors 

Name  of 
Stockholder 

Totals 

241.  The  above  form  of  tally  sheet  is  recommended  where 
the  number  of  stockholders  is  limited.  It  is  convenient  in 
form  and  may  be  easily  filed  away  for  future  reference,  but 
where  the  number  of  stockholders  is  great,  the  names  are 
omitted.  Instead,  the  chair  appoints  a  call  clerk  and  two  tally 
clerks,  the  former  calls  the  names  and  the  vote  for  each  candi- 
date, and  the  latter  tally,  each  keeping  a  check  on  the  other. 
Previous  to  this  the  chair  appoints  a  comimttee,  whose  duty 
it  is  to  examine  all  proxies.     This  committee  reports  to  the 


100 


CORPOEATION    ACCOUNTING 


meeting  on  the  validity  or  irregularity  of  the  various  proxies. 
The  report  is  disposed  of  in  the  regular  order  of  business,  and 
those  holding  regular  and  valid  proxies  are  allowed  to  vote 
them.  The  foregoing  five  forms  can  be  obtained  in  "Carney's 
Handy  Book"  for  corporations. 

Subscription  Book. 

242.  We  the  undersigned,  agree  to  take  the  number  of 
shares  of  the  Capital  Stock  of  the  Gold  and  Silver  Mining 
Company,  of  the  par  value  of  Twenty  Dollars  ($20.00)  per 
share',,  set  opposite  our  respective  names,  as  follows,  to-wit: 


Names 

No. of  Shares 

Amount 

Signatures 

We,  the  undersigned  officers  of  the  above  mentioned  com- 
pany, do  hereby  certify  the  foregoing  to  be  a  true  and  correct 
list  of  the  subscribers  to  the  Capital  Stock  of  the  above  named 
corporation. 

Wm.  Glass,  President. 

C.  H.  Rowell,  Secretary. 

243.  The  subscription  book  is  an  expedient,  though  not  a 
necessary  part  of  the  records  of  every  corporation.  It  should 
at  least  be  preserved  until  all  the  subscribed  stock  is  paid  for. 
It  often  takes  the  place  of  the  Stock  Journal,  the  posting  being 
done  from  it  direct  to  the  stockholders'  accounts  in  the  Stock 
Ledger;  those  accustomed  to  posting  from  books  of  original' 
entry  will  see  the  utility  and  economy  of  this  method. 

Subscription  is  Binding. 

244.  Where  there  are  not  many  stockholders,  a  Subscrip- 
tion List  takes  the  place  of  the  Subscription  Book.  In  many 
cases  the  list  is  not  used  from  choice,  but  from  necessity.  This 
is  true  in  the  case'  of  many  oil  and  mining  companies.  Such 
companies  often  have  agents  in  different  parts  of  the  state 
soliciting,  and  they  each  have  a  subscription  list,  which  the 
prospective  stockholders  sign.     These  lists  are  sent  in  to  the 


AND    COEPOEATION    LAW  lOi 

office  when  filled,  numbered  consecutively y,  ar|4  r^^e'^f  in  samp ' 
safe  place  until  all  the  stock  is  subscribed,  of  until  the  sub- 
scription list  is  closed ;  they  are  then  bpiind  zo^e,t\i^ti^  pji^pd: 
and  indexed  if  desired.  It  should  be  remeinbeied  that  wnen 
one  signs  a  Subscription  Book  or  List,  he  binds  himself  to 
take  the  stock  he  has  agreed  to,  and  he  may  be  sued  for  the 
amount  of  his  unpaid  subscription.  This  is  both  reasonable 
and  logical.  He  has  entered  into  a  contract  between  himself 
and  the  corporation,  the  consideration  being  that  he  shall  have 
an  interest  in  the  business  and  share  in  its  profits,  therefore 
the  corporation  can  enforce  this  contract  against  him.  If  this 
was  not  so  a  new  company  might  be  destroyed  in  embryo  by 
recalcitrant  subscribers. 

Conditional  Subscription. 

245.  In  many  large  speculative  corporations  where  the 
launching  of  the  enterprise  depends  upon  the  securing  of  a 
certain  minimum  of  pledged  capital,  it  is  customary  to  insert 
a  saving  clause  to  this  effect :  "This  agreement  is  conditioned 
on  the  securing  by  the  aforesaid  corporation  of  other 
bona  fide  subscriptions  to  the  capital  stock  aggregating  not 

less  than thousand  shares."     It  is  contended 

by  some  authorities  that  it  is  a  principle  of  common  law  that 
no  contract  for  subscription  is  enforceable  against  the  sub- 
scriber until  all  of  the  stock  is  subscribed.  With  this  conten- 
tion we  are  not  concerned  here ;  the  point  sought  to  be  made 
is  this :  the  subscriber  should  not  thoughtlessly  put  his  name 
to  anything  that  might  make  him  defendant  in  a  law  suit. 

246.  Two  forms  of  Subscription  Lists  are  here  given. 
Further  on  is  a  form  of  contract  for  stock  which  takes  the 
place  of  both  the  Subscription  Book  and  List. 

Location  of  Mines^  Business  Ofiice  of  Company, 

Fresno  County,  Cal.  San  Francisco,  Cal. 

Subscription  List. 

We,  the  undersigned,  agree'  to  take  stock  in  the  Free  Gold 
Mining  Company,  for  the  amount  set  opposite  our  respective 
names.  Said  stock  to  be  of  the  par  value  of  $5.00  per  share, 
payable  in  monthly  instalments  of  25  cents  per  share',  per 
month,  until  fully  paid — payments  to  commence  on  delivery 
of  contract,  it  being  optional  on  the  part  of  subscribers  to  pay 
for  same  in  advance  and  receive  10  per  cent  discount,  or  6  per- 
cent discount  for  ten  months  in  advance  on  delivery  of  con- 
tract. 


102 


COBPOEATION    ACCOUNTINO 


:  'l>Ate     > 

^".T    ':  ^':'  ^^atines 

No. 

Shares 

Signatures 

Address 

\ )  'i  ^ 

^^  ^:  -^    •:  :\ 

247.  The  above  form  is  recommended  for  the  purpose  for 
which  it  is  intended,  on  account  of  its  completeness  in  form, 
and  brevity  in  construction.  The  agent  fills  in  the  date  and 
the  name  of  the  subscriber  in  a  clear  legible  hand  and  forwards 
his  list  to  the  office,  where  the  contract  referred  to  is  filled  in, 
in  duplicate,  and  sent  back  to  the  agent  for  the  subscriber's 
signature.  In  a  subsequent  paragraph  will  be  found  a  method 
of  filing  these  contracts  and  also  mention  of  its  advantages. 


Subscription  List  (Form  2). 

348.  The  subscribers  hereto,  each  for  himself,  and  not  one 
for  the  other,  agree  with  the  Kerosine  Oil  Company  (a  cor- 
poration) to  purchase  of  said  corporation  the  number  of 
shares  of  its  Capital  Stock  set  opposite  their  respective  names 
upon  the  following  conditions  to-wit: 

(i)  That  the  arpount  to  be  paid  said  corporation  for  each 
share  of  said  Capital  Stock  is  Fifty  Dollars  (its  par  value), 
payable  as  follows : 

(2)  When  the  Board  of  Directors  of  said  corporation 
shall  have  certified  that  twenty-five  per  cent  of  its  Capital 
Stock  has  been  agreed  to  be  purchased,  then,  and  upon  the 
happening  of  that  event,  there  shall  become  due  and  payable 
to  said  corporation  twenty-five  per  cent  of  the  amount  of  each 
share  agreed  to  be  purchased,  and  thereafter  there  shall  be- 
come due  and  payable  an  amount  equal  to  ten  per  cent  of  the 
par  value  of  said  stock  each  and  every  month  until  the  whole 
amount  thereof  has  been  paid. 

(3)  That  when  said  first  payment  of  twenty-five  per  cent 
shall  have  been  made  upon  each  share  of  said  stock,  said  cor- 
poration will  issue  to  the  purchaser  of  the  same  a  Certificate 
of  its  Capital  Stock  showing  the  number  of  shares  purchased 
with  the  amount  paid  endorsed  thereon. 

(4)  It  being  expressly  understood  and  agreed  by  said 
corporation,  that  it  will  not  at  any  time  contract  any  indebt- 


AND    CORPORATION    LAW 


loa 


edness  in  excess  of  the  par  value  of  the  number  of  shares  of 
its  Capital  Stock  issued. 

Dated  at  Fresno,  Cal.,  January  i,  1905. 

The  Kerosene  Oil  Company, 
By  G.  E.  Wentzel,  Secretary. 
By  H.  E.  Dore,  President. 


Name 

Address 

N  0.  Shares  Taken 

249.  This  form  cannot  be  recommended  for  its  brevity,  but 
it  has  its  good  points.  It  is  a  conditional  subscription  depend- 
ing upon  the  happening  of  a  certain  event ;  in  fact  it  is  a  con- 
tract between  the  corporation  and  its  subscribers,  in  which 
each  is  bound  to  the  other  to  do  certain  things,  contingent 
upon  the  happening  of  certain  other  things.  It  has  its  place 
and  a  value  in  that  place. 

250.  As  may  be  seen  from  the  foregoing  lists  there  are 
many  ways  of  subscribing  for  stock,  and  various  terms  and 
conditions  of  payment;  there  are  also  many  methods  of  issu- 
ing certificates.  Some  companies  issue  certificates  on  the  pay- 
ment of  10  per  cent  or  any  other  fractional  part,  with  a 
form  on  the  back  of  the  certificate  for  the  endorsement  of 
future  payments,  the  certificate  not  being  considered  paid  up 
until  the  final  endorsement  is  made.  Others  issue  instalment 
Scrip  for  each  payment,  exchangeable  for  certificates  when  the 
final  instalment  is  paid.  Still  others  issue  contracts  for  cer- 
tificates, which  are  arranged  for  the  endorsement  of  payments,, 
and  are  exchanged  for  certificates  on  the  conditions  of  the  con- 
tract being  fulfilled.  Again  others  issue  certificates  on  the 
payment  of  a  fractional  part  of  the  nominal  value  of  the  stock,, 
and  levy  assessments  from  time  to  time  as  the  needs  of  the 
business  demand;  while  others,  under  the  pretense  of  giving" 
something  for  nothing,  issue  paid-up  non-assessable  stock  on 
the  payment  of  say  ten  cents  on  the  dollar ;  but  this  trick  will 
not  save  the  stockholder  from  liability  in  case  of  failure.  Some 
State  laws  require  that  the  amount  paid  on  stock  shall  be  en- 
dorsed on  the  certificate  (California  does  this  now),  so  that 
the  purchaser  may  know  the  balance  of  liability  he  is  assum- 
ing, or  the  lender  know  the  value  of  his  collateral.  'Tis  a 
pity  that  this  is  not  the  universal  rule,  although  no  person 


104 


CORPOEATION    ACCOUNTINa 


should  be  foolish  enough  to  purchase  stock  in  any  company 
on  the  mere  showing  of  the  certificate. 


251. 


Instalment  Scrip  Book. 


iNSTAIvMENT 

Scrip. 

No 

Fresno,  Cal. 
.    ...  Shares 

0 

^. 
< 

i 

$ Shares 

Qold  and  Silver  Mining  Company. 

Rejckivkd  from 

Dollars, 

the    same    being-    the    first   instalment     of 

Dollars  per  share,  on 

shares  of  the  Capital  Stock  of  the 

1st   Instalment 
per  cent. 

Received  the 

G01.D  AND  Sii<vKR  Mining  Company, 
the  said  shares  are  set  aside  for  the  above 
named  subscriber  or  his  assigns,  conditional 
on  the  fulfillment  of  the  terms  of  subscrip- 
tion. 

above  Scrip, 

President. 

Secretary. 

Contract  for  Dielivery  of  Stock. 

252.     Contract  No Shares. 

The  Anglo-California  Mining  and  Development  Company. 

Location  of  Mines,  Tuolumne  County,  Cal. 

Business  Office,  San  Francisco,  Cal. 

This  Agreement,  entered  into  this day 

of 1905,  between  The  Anglo-California 

Mining  and  Development  Company,  a  corporation  organized 

under  the  laws  of  California,  and 

of 

Witnesseth :  That  for  and  in  consideration  of  the  sum  of 
$5.00  to  be  paid  to  said  Anglo-California  Mining  and  Develop- 
ment Company,  by  said in  the  man- 
ner hereinafter  provided,  said  Company  hereby  agrees  to  sell 

and  deliver  to  said (  )  Shares  of 

Its  capital  stock,  of  the  par  value  of  $5.00  per  share,  subject  to 
the  provisions  contained  in  the  By-Laws  of  this  Company, 
and  upon  the  following  terms  and  conditions,  to-wit : 

1st.     That  said shares  shall  be  paid  for  in  monthly 

instalments  of  twenty-five  cents  per  share  until  the  price  of 
$5.00  per  share  is  fully  paid. 

2nd.  That  said  shares  shall  be  delivered  to  said 
or  assigns,  when  said  price  of  $5.00  per 


AND    CORPOKATION    LAW  105 

share  is  fully  paid  up,  and  upon  the  return  and  surrender  of 
this  contract  to  said  Company. 

3rd.  That  without  further  notice,  the  times  and  place  of 
payment  shall  be  the  first  day  of  each  calendar  month  after 
the  date  hereof,  at  the  office  of  said  Company. 

4th.  If  default  shall  be  made  in  the  payment  of  any  instal- 
ment required  by  this  contract  during  the  whole  of  the  calen- 
dar month  upon  the  first  day  of  which  said  instalment  became 
due  and  payable,  the  Secretary  of  this  Company  shall  immedi- 
ately notify  the  holder  of  this  contract  of  such  default  by  no- 
tice addressed  to  him  and  deposited  in  the  United  States  post 
office  at  San  Francisco,  California,  and  if  such  instalment  shall 
not  be  paid  within  thirty  days  from  and  after  the  date  of  such 
notice,  this  contract  shall  immediately  become  void  and  the 
holder  thereof  shall  immediately  forfeit  all  right,  title  and  in- 
terest in  the  shares  of  stock  herein  mentioned,  and  in  and  to 
all  sums  of  money  previously  paid  for  stock,  and  said  stock 
and  said  money  shall  be  the  property  of  said  Company. 

5th.  If  this  contract  shall  become  void  and  the  stock 
herein  mentioned  shall  be  forfeited  under  the  provisions  of  the 
above  numbered  clause  four,  then  and  in  that  case  the  Secre- 
tary of  the  Company  shall  immediately  issue  to  the  holder 
thereof  a  certificate  for  fully  paid  up  shares  of  capital  stock  to 
the  amount  of  fifty  per  cent  of  all  money  paid  to  the  Company 
under  the  provisions  of  this  contract. 

6th.  Beyond  the  payments  required  by  this  contract  no 
other  assessments  shall  be  made  or  payments  required. 

7th.  This  contract  shall  be  binding  on  the  successors, 
heirs  and  assigns  of  the  respective  parties  hereto,  but  no  as- 
signment hereof  shall  be  binding  on  this  Company  until  such 
assignment  is  endorsed  hereon,  nor  until  this  Company  is 
notified  of  the  person  to  whom  it  is  assigned,  nor  until  it  ap- 
pears by  the  certificate  of  the  Secretary  of  this  Company  en- 
dorsed hereon,  that  all  instalments  due  on  this  contract  up  to 
the  time  of  the  proposed  assignment  have  been  paid,  and  un- 
less such  certificate  be  endorsed  hereon,  no  assignee  shall  have 
any  claim,  interest  or  right,  to,  in,  or  under  this  contract. 

In  Witness  Whereof,  the  said  Company  has  caused  its 
name  and  corporate  seal  to  be  hereunto  subscribed  and  af- 
fixed, and  the  said has  hereunto  subscribed 

his  name,  on  the  day  and  year  first  above  written. 


President, 
Secretary. 


106  CORPOBATION   ACCOUNTING 

Form  of  Transfer. 

253.  For  value  received  I  hereby  transfer  and  assign  the 
within  Contract,  and  all  my  right,  title  and  interest  therein 
to this day  of 190.  . 


I  hereby  certify  that  all  the  instalments  due  on  the  within 
Contract  up  to 190-  •  have  been  regu- 
larly paid  by 

Dated  San  Francisco,  190. . . 


Secretary  Anglo-California 

Mining  and  Development  Co. 

Form  of  Endorsing  Payments. 

254.  Received  payment  of  monthly  instalments  on  the 
within  Contract  as  follows : 

For  the  month  of 190 Secy. 

For  the  month  of 190 Secy. 

For  the  month  of 190 Secy. 

For  the  month  of 190 Secy. 

For  the  month  of 190 Secy. 

For  the  month  of 190 Secy. 

For  the  month  of 190 Secy. 

Manner  of  Caring  for  Contracts. 

255.  The  contract  form  of  selling  stock  on  the  instalment 
plan  is  becoming  popular  for  obvious  reasons.  These  contracts 
are  issued  in  duplicate  one  being  retained  by  the  company, 
and  one  given  to  the  subscriber;  they  are  transferable  same 
as  certificates.  The  best  way  to  keep  them  is  to  get  two  Arch 
files  and  indexes,  the  size  of  the  contract,  and  place  the  orig- 
inals on  file  alphabetically ;  if  they  are  very  numerous  they  can 
be  subindexed,  so  that  any  contract  can  be  easily  located.  The 
second  file  is  used  for  cancelled  or  uncompleted  contracts ;  that 
is  to  say,  if  a  person  transfers  his  contract,  the  old  one  is  sur- 
rendered and  a  new  one  issued,  and  when  a  contract  is  ful- 
filled it  is  surrendered  and  a  certificate  issued.  In  either  case 
the  surrendered  contract  is  placed  on  file  in  the  same  manner 
as  the  originals,  and  so  on  until  all  the  contracts  are  in,  at 
which  time  the  company  will  have  all  the  originals  and  all  the' 
duplicates  on  file  when  they  may  be  placed  in  binders  and  pre- 
served as  a  part  of  the  company's  records. 


AND    COEPOEATION    LAW 


107 


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108  COBPOEATION    ACCOUNTING 

Form  of  Endorsement. 

257.     For  value  received, hereby  sell,  assign  and 

transfer  unto  

Shares  of  the  Capital  Stock  of 

the  within  Certificate,  and hereby  irrevocably  con- 
stitute and  appoint true 

and  lawful  attorney.  . .,  for and  in name, 

place  and  stead,  but  to benefit,  to  sell,  assign  and 

transfer  all  or  any  part  of  the  said  stock,  and  for  that  purpose" 
to  substitute  one  or  more  persons  with  like  full  power. 
Dated 190. . . 


Witness  to  Signature: 


258.  The  above  form  is  a  transfer  by  attorney  and  author- 
izes such  attorney  to  sign  the  transfer  book  and  convey  title 
to  the  transferee. 

Another  Form  of  Transfer. 

259.  For  value  received hereby  as- 
sign and  transfer  to of  the 

shares  of  the  within  certificate  and  by  these  presents  authorize 
the  Secretary  of  the  Corporation  to  make  the  necessary  trans- 
fer upon  the  books  of  the  corporation,  issuing  to  the  trans- 
feree. .  .the  above  mentioned  number  of  shares,  and  to  myself 
the  balance,  if  any,  remaining. 


Witness 

Dated 190. . . 

Points  About  Transfer  Which  Every  Stockholder  Should 
Know.  Legal  Titles.  Essence  of  Every  Contract. 

260.  There  are  many  things  connected  with  the  transfer 
of  stock  that  are  but  little  understood  by  many  stockholders. 
The  transferee  does  not  bear  the  same  relation  to  the  company 
or  its  creditors  that  the  original  subscriber  did,  ordinarily 
speaking.  Where  the  transferee  purchases  the  stock  in  good 
faith  and  pays  full  value  therefor,  he  will  not  be  held  liable  for 
any  unpaid  balance  on  the  subscription,  but  the  original  sub- 
scriber will  be  held  liable.  There  are  two  titles  resting  in 
every  certificate — an  equitable  and  a  legal  title.  When  the 
transferee  receives  the  stock  he  has  legal  title  to  it  as  between 
himself  and  the  transferor;  but  as  between  himself  and  the 


AND    CORPOEATION    LAW  109 

corporation  he  has  only  an  equitable  title;  in  other  words,  he 
is  a  stock  owner,  not  a  stockholder.  To  be  a  stockholder  and 
acquire  a  legal  and  equitable  title  to  his  stock,  as  between  him- 
self and  the  corporation,  he  must  have  the  stock  transferred 
on  the  books  of  the  corporation  in  his  name.  It  is  very  im- 
portant, therefore,  that  the  transferee  of  stock  should  have  the 
transfer  made  on  the  books  of  the  company,  as  until  he  does' 
he  is  not  entitled  to  vote,  to  receive  dividends,  or  to  any  notice 
or  information  of  what  is  doing,  or  to  be  done.  In  the  mean- 
time the  original  holder  is  what  is  called  a  trustee  **sub  modo" 
for  the  transferee,  and  any  dividends  that  accrue  to  him  are 
held  only  in  trust  for  the  transferee;  but  it  is  obvious  to  any 
one,  that  neglect  in  this  matter  may  mean  loss  and  trouble; 
and  again  the  essence  of  every  contract  is  that  one  parts  with 
certain  rights  and  another  acquires  those  rights,  and  rights 
always  imply  responsibilities,  therefore  one  can  not  success- 
fully defend  himself  against  liability  on  the  ground  that  he 
was  not  a  stockholder  of  record;  the  principle  involved  being 
that  "the  duty  to  bear  burdens  is  correlative  to  the  right  to 
take  benefits." 

Manner  of  Making  Transfers. 

261.  As  may  be  inferred  from  the  preceding  remarks,  there 
are  many  ways  of  transferring  one's  interest  in  stock  shares. 
Many  of  the  larger  Corporations  whose  stocks  are  offered  to 
the  general  public  make  use  of  a  regular  "Registrar  and  Trans- 
fer Agent"  for  the  registration  of  all  issues  and  transfers  of 
stocks  and  bonds.  It  is  customary  for  a  Trust  Company  to 
act  in  this  capacity  and  it  is  their  duty  to  see  that  there  is  no 
fictitious  or  over  issue  of  stock,  and  that  all  transfers  are 
made  conformable  to  the  particular  laws  governing  the  same. 
These  Trust  Companies  acting  in  this  capacity  stand  between 
the  stockholders  and  the  corporation,  safeguarding  the  in- 
terests of  both  and  inspiring  public  confidence  in  the  securities 
which  they  handle.  But  assuming  that  all  transfers  are  to  be 
made  at  the  company's  office  and  that  the  by-laws  provide  for 
all  transfers  being  made  in  person  or  by  attorney,  the  follow- 
ing is  suggested  as'  a  correct  "Modo  et  forma."  The  stock- 
holder appears  at  the  office  of  the  company  either  in  person 
or  by  attorney,  and  having  previously  endorsed  his  certificate, 
he  fills  in  a  transfer  blank  transferring  his  stock,  or  a  portion 
of  it,  as  the  case  may  be.  Of  course  if  the  vendor  of  the  stock 
appoints  the  Secretary  of  the  Company  his'  attorney  to  make 
the  transfer  (See  form  of  endorsement  259),  the  vendee  of 
the  stock  can  present  it  for  transfer  himself.    These  transfer 


110  CORPOEATION    ACCOUNTING 

blanks*  are  two,  three  or  four  on  a  page,  and  are  numbered 
consecutively;  they  give  the  number  of  the  certificate  trans- 
ferred, and  the  number  of  the  one  issued  in  its  stead ;  they  also 
give  the  number  of  the  pages  on  which  the  surrender  and  re- 
issue entries  are  made,  and  in  this  way  serve  as  an  index  to 
the  accounts.  From  this  book  all  the  transfers  are  posted,  the 
parties  surrendering  their  stock  being  credited,  and  the  parties 
receiving  it  being  debited  for  the  number  of  shares.  (The 
question  of  whether  a  stockholder  should  be  debited  or  cred- 
ited for  his  stock  will  be  found  treated  elsewhere  in  this  work). 
Another  way  is  to  have  a  Stock  Ledger  "folio  column"  in  this 
book,  and  opposite  the  names  of  the  transferror  and  the  trans- 
feree give  the  pages  of  the  Stock  Ledger  to  which  the  entries 
are  posted.  Sometimes  several  certificates  are  transferred  for 
which  only  one  is  re-issued,  or  several  may  be  re-issued  for 
only  one  transferred ;  to  meet  this  emergency  space  can  be  left 
on  the  transfer  blank  opposite  the  certificate  number  and  the 
re-issue  number,  or  brackets  may  be  inserted,  or  the  form  may 
be  modified  by  the  use  of  a  stub  prepared  especially  for  re- 
cording this  data.  As  soon  as  a  certificate  is  surrendered  the 
word  "cancelled"  should  be  stamped  on  the  face  of  it,  the  date 
added,  and  the  certificate  pasted  back  on  its  own  stub  in  the 
Certificate  Book.  If  anybody  ever  raises  a  question  about  the 
transfer  of  stock,  a  look  at  their  account  will  give  the  number 
of  the  transfer,  and  as  these  are  recorded  consecutively  in  the 
Transfer  Book  it  can  be  located  in  shorter  time  than  it  takes 
to  write  this.  If  the  Transfer  Book  shows  that  it  was  signed 
by  somebody  as  attorney,  his  authority  for  so  doing  can  be 
obtained  by  turning  to  the  cancelled  certificate,  the  number  of 
which  is  here  given,  and  which  is  pasted  on  its  own  stub.  The 
endorsement  on  the  certificate  will  show  that  the  transferror 
has  appointed  as  his  attorney  to  make  the  transfer,  the  person 
who  signed  the  Transfer  Book,  and  thus  the  chain  of  evidence 
will  be  complete,  the  logical  sequence  of  every  act  established. 

Form  of  Transfer  Register. 

262.     Transfer  Number for Shares  Transferred 

by Folio . . .  Transferred  to Folio . . . 


Certificate  No Re-issue  Number 

For  value  received hereby  assign  and  transfer  unto 

all right,  title  and  in- 

*Vi(ie  paragraphs  284  and  285. 


AND    CORPORATION    LAW  111 

terest  in Shares  of  the  Capital  Stock  of  the  Gold  and 

Silver  Mining  Co.,  now  standing  on  its  books'  in name. 

By:::;:;:::::::;;::::::::::::::::: 

Attorney. 
Dated  this day  of 

Certificates — How  Paid  For. 

263.  Reverting  to  the  subject  of  stock  certificates,  every 
state  makes  the  issue  of  stock  conditioned  on  the  exchange  of 
value;  the  medium  of  exchange  is  also  a  subject  of  legislation. 
For  example,  the  laws  of  California  provide  that  "No  corpora- 
tion shall  issue  stock  or  bonds  except  for  money  paid,  labor 
performed  or  property  actually  received."  These  same  pro- 
visions obtain  in  Delaware,  while  New  Jersey  limits  the  ex- 
change to  money  or  property.  All  fictitious  or  clandestine 
issues  of  stock  are  void.  Stock  in  a  corporation  being  personal 
property,  the  owner  of  it  may,  generally  speaking,  give  it  away 
for  a  nominal  consideration,  but  a  corporation  cannot  do  this, 
excepting  that  when  a  corporation  has  a  number  of  shares  of 
stock  in  its  treasury  which  it  does  not  desire  to  sell,  it  may, 
upon  the  written  application  and  assent  of  all  the  stockholders, 
distribute  the  treasury  stock  pro  rata  among  its  stockholders. 
This  method  of  paying  a  stock  dividend  is  not  a  general  prin- 
ciple of  corporation  law,  but  obtains  where  the  liability  of  the 
stockholder  exceeds  the  par  of  the  stock,  and  the  ratio  of  lia- 
bility varies  directly  with  the  corporation  debts,  as  in  Califor- 
nia. It  is  doubtful  if  it  would  hold  where  the  liability  is  lim- 
ited; that  is',  it  is  questionable  if  in  case  of  insolvency,  the 
stockholders  would  not  have  to  pay  for  the  benefit  of  the  cred- 
itors the  par  value  of  the  stock  so  held  by  them ;  and  yet  this 
would  be  imposing  additional  obligations  without  correspond- 
ing benefits ;  but  this  is  one  of  those  points  about  which  it  is 
best  to  consult  an  attorney  before  taking  action. 

Best  Form  of  Certificate. 

264.  The  best  form  of  certificate  is  one  which  provides  for 
the  signing  of  the  stub  by  the  stockholder,  and  the  transfer 
of  the  certificate  either  in  the  person  of  the  owner,  or  by  his 
lawfully  constituted  attorney.  See  paragraphs  256,  257  and 
259.  In  large  corporations,  where  they  have  a  transfer  agent, 
it  is  customary  to  appoint  him  attorney  to  make  transfers, 
otherwise  the  secretary  or  any  other  officer  of  the  company 
may  be  appointed  for  this  purpose. 


112  CORPORATION    ACOOUNTINO 

265.  Of  course  in  companies'  whose  stocks  are  listed  on 
exchange,  the  form  here  referred  to  would  be  found  incon- 
venient, where  stock  certificates  are  continually  changing 
hands.  For  such  cases  the  best  form  is  the  simple  endorse- 
ment, as  one  endorses  a  check  or  draft.  This  makes  the  cer- 
tificate negotiable,  and  it  may  pass  current  from  one  hand  to 
another  until  it  finally  reaches  the  office  of  the  company  for 
transfer.  When  it  does  reach  the  office  a  record  is  made  on 
the  journal  of  the  name  of  the  person  who  left  it. 


CHAPTER  VII. 

Illustrating  Five  Forms  of  Stock  Ledgers  and  Elucidating 
the  Manner  of  Keeping  Them. — The  Simplest  and  Best  Form 
of  Stock  Ledger. — Stock  Journals  and  New  Form  of  Transfer 
Book. 


266.  In  stock  companies  or  corporations  there  are  two 
sets  of  books,  a  private  set  consisting  of  Minute  Book,  By- 
Laws  Book,  Stock,  Ledger,  Stock  Journal  and  Transfer  Book, 
and  sometimes  a  Bond  Register,  Instalment  Book  and  Divi- 
dend Book ;  these  books  are  usually  kept  by  the  secretary ;  and 
the  general  commercial  or  financial  books  of  the  corporation 
which  are  kept  by  the  bookkeeper. 

26y.  Accountants  differ  as  to  the  best  forms  for  these 
books  as  well  as  to  the  best  manner  of  keeping  them.  Having 
illustrated  the  Minute  Book  and  explained  the  object  of  the 
By-Laws  Book,  it  is  now  in  order  to  present  some  of  the 
Ledger,  Journal  and  Transfer  forms  and  illustrate  the  manner 
of  keeping  them.  Whatever  forms  of  books  are  kept,  they 
should  be  intelligible  and  susceptible  of  easy  explanation  to 
one  not  familiar  with  accounting.  This  particularly  applies  to 
corporation  accounting,  where  every  stockholder  has,  under 
certain  conditions,  the  legal  right  to  examine  the  books  of  the 
company  and  require  an  explanation  of  every  entry.  It  is  a 
mistake  to  suppose  that  good  accounting  is  essentially  com- 
plicated. Good  accounting  has  as  one  of  its  attributes  sim- 
plicity. 

Forms  of  Stock  Ledger  and  Other  Auxilliary  Books. 

268.  The  forms  of  books  and  the  method  of  opening  and 
keeping  them  are  not  always  the  choice  of  the  book-keeper, 
and  even  if  they  were,  differences  of  opinion  arise  as  to  the 
best  form  and  the  best  method.  In  order  to  meet  various'  condi- 
tions and  different  views,  various  forms  and  methods  will  be 
described  and  illustrated — the  illustrations  are  merely  "pro 
forma."  As  a  matter  of  fact  the  keeping  of  the  Stock  Ledger 
and  Stock  Journal  may  be  as  simple  and  as  primitive  as  one 
pleases,  but  the  rapid  age  in  which  we  live  requires'  forms  of 
quick  and  easy  reference,  comprehensive  yet  lucid,  detailed 


114 


CORPOEATION    ACCOUNTING- 


yet  economic.  Usually  the  stock  ledger  is  kept  by  a  single 
entry.  Some  credit  each  stockholder  with  his  stock,  in  the 
Stock  Ledger,  and  some  debit  him.  Some  use  Stock  Ledgers 
with  money  columns,  showing  the  value  of  the  shares  in  dol- 
lars and  cents,  and  others  use  Ledgers  showing  only  the  num- 
ber of  shares ;  but  in  one  characteristic  all  Stock  Ledgers  must 
agree,  that  is.  Stock  Ledgers  must  contain  accounts  with  all 
the  stockholders,  showing  the  number  of  shares  held  by  each, 
how  and  from  whom  they  acquired  them,  how  and  to  whom 
they  disposed  of  them. 

Form  2. 

269.  The  journalizing  is  done  from  the  Certificate  Book  or 
the  Subscription  Book  into  an  elaborate  Jouranl  which  gives  a 
complete  record  of  the  sale  of  the  stock  and  subsequent  trans- 
fer. 


Form  2. 


Stock  Journal. 

Left  Hand  Page 


Date 
1905 

By  Whom 
Surrendered 

Certificate  Cancelled 

Ledger 
Folio 

Certifl'te 
No. 

No.  of 

Shares 

Left  By 

Jan. 

1 

Feb. 

1 

Paul  Jones 

1 

2 

10 

Himself 

1 

Thomas  Brown 

2 

3 

10 

His  Attorney 

1 

10 

Form  I. 

270.  This"  is  the  old  style  of  ordinary  ruled  Journal  and 
Ledger,  in  which  Capital  Stock  is  debited  and  individual  ac- 
counts credited  in  the  Stock  Ledger.  Transfers  are  recorded 
in  the  Stock  Journal  by  an  ordinary  cross  entry,  with  the 
necessary  explanations.  When  all  stock  is  sold  or  subscribed, 
the  Capital  Stock  account  will  be  debited  for  the  full  capital 
and  the  stockholders  will  be  credited  for  an  equal  amount,  and 
the  Ledger  will  then  be  in  balance. 


AND    CORPORATION    LAW 


115 


Stock  Ledger — Form  i. 

JOHN  SMITH. 


1905 
Jan. 
Feb. 


To  Paul  Jones, 

50  Shs. 
"    Balance,  50     " 


500 

500 
1,000 


1905 
Jan. 

Jan. 


100  Shs. 


50  Shs. 


V 


1,000 


1,000 


500 


00 


00 


00 


This  shows  that  Smith  subscribed  for  $i,ooo  worth  of 
stock,  that  he  afterwards  transferred  $500  worth  to  Jones,  and 
that  he  has  $500  worth  left. 


Form  2. 


Stock  Journal. 

Right  Hand  Page 


Certificate  Issued 

Signature 

In  Whose  Favor 

Ledger 
Folio 

No 
Certifl'te 

No.  of 
Shares 

Total  No. 
Shares 

Subject  to  By-Laws  of 
Company 

John  Smith 

1 

1 

10 

10 

John  Smith 

Paul  Jones 

2 

2 

10 

20 

Thomas  Brown 

3 

3 

10 

30 

William  White 

4 

4 

10 

Andrew  Green 

5 

5 

5 

Thomas  Brown 

3 

6 

5 

Wm.  Patterson 

6 

7 

10 

40 

271.  As  will  be  seen  by  the  illustration,  the  dates  of  issue 
and  transfer  are  all  on  one  page,  and  each  stockholder  is  cred- 
ited for  the  amount  of  stock  issued  to  him.  When  he  transfers 
any  of  his  stock  he  is  debited  for  the  shares  of  his  surrendered 
certificate,  and  the  transferee  is  credited  for  whatever  portion 
•of  it  is  transferred  to  him.  The  original  stockholder  is  then 
credited  for  the  remainder,  if  any.  The  total  number  of  shares' 
sold  is  kept  track  of  as  shown  in  the  illustration.  This  form 
finds  favor  with  companies  whose  stocks   are  listed  on  ex- 


116 


COE-POEATION    ACCOUNTING 


change.  The  fact  that  stocks  are  listed  on  exchange  is  sup- 
posed to  be  a  guarantee  of  their  genuineness,  as  it  is  under- 
stood that  the  Hsting  committee  makes  a  thorough  examina- 
tion into  the  affairs  of  a  company  before  allowing  its  stock  to 
be  listed.  For  this  reason  stock  so  listed  passes  from  hand  to 
hand  by  a  simple  endorsement  until  it  finally  reaches  the  office 
of  the  company  for  transfer,  whereupon  the  name  of  the  per- 
son leaving  the  stock  is  entered  in  the  Journal  under  the  head- 
ing "Left  By." 

2^2.     Stock  Ledger — Form  2. 

JOHN  SMITH. 


Certificates  Cancelled 

Certificates  Issued 

Date 
1905 

Jour, 
Folio 

Certifi'te 
No. 

No.  of 
Shares 

Frac- 
tional 

Date 
1905 

Jour. 
Folio 

Certifi'te 
No. 

No.  of 
Shares 

Frac- 
tional 

Feb. 

1 

1 

2 

10 

Jan. 
Feb. 

1 

1 

1 
2 

3 
6 

10 

5 

273.  In  this  form  of  Ledger  the  shares  only  are  entered. 
Each  stockholder  is  credited  for  the  number  of  shares  issued 
to  him,  and  debited  when  he  surrenders'  or  transfers  his  stock ; 
this  entry  balances  his  account.  He  is  again  credited  as  shown 
in  the  illustration  for  the  number  of  shares  re-issued  to  him. 
The  difference  between  the  two  sides  shows  the  balance  of 
shares  he  owns'  or  holds ;  or  the  account  may  be  balanced  by 
ruling  it  down  as  done  in  this  instance,  and  then  the  credit 
side  will  show  the  standing  of  it. 

Form  3. 

274.  The  Journal  for  this  form  differs  so  little  from  Form 
2  and  the  same  form  will  answer  for  both  so  well  that  it  is  not 
thought  necessary  to  take  up  space  in  illustrating  it.  The 
Ledger,  however,  differs  so  widely  from  the  other  that  it  is 
thought  best  to  explain  and  exemplify  it.  A  complete  record 
of  the  stock  issued  is  kept  in  this  Ledger,  and  the  stockholder 
is  charged  in  the  money  columns  for  the  par  value  of  the  stock 
he  has  subscribed  for,  and  credited  for  subsequent  payments 
on  it.  When  the  stock  is  paid  for  these  columns  are  ruled 
down  and  closed,  and  only  the  columns  showing  the  number 
of  shares  issued  and  transferred  are  used,  unless,  as  sometimes 
happens,  assessments  are  subsequently  entered  in  the  money 
columns.  (In  California  assessments  may  be  levied  above  the 
par  of  the  stock). 


AND    CORPORATION    LAW 


117 


275.     Stock  Ledger — Form  3. 

JOHN  JONES. 


Date 
1905 

Folio 

Cert. 

No. 

Tran. 
No. 

No. 
Shs. 
Iss'd. 

No. 
Shs. 
Tran. 

To  Whom 
Transferred 

Particulars 

Debit 

Credit 

Jan. 
Jan. 
Feb. 

1 

10 

1 
10 

S.J. 

1 

C.B. 
1 

C.B. 

20 

S.J. 
2 

1 
10 

10 

5 

John  Smith 

10Shs.@|10each 
Bylstlnstal  m't 
«',2d 

100 

00 

50 
50 

00 
00 

100 

00 

100 

00 

2y6.  This  form  shows  that  Jones  has  paid  for  his  stock, 
and  that  he  afterwards  transferred  five  shares  of  it.  The  dif- 
ference between  the  "Issued"  and  "Transferred"  cohimns 
shows  the  balance  of  shares  held  by  him.  The  new  No.  in  the 
certificate  column  shows  the  number  of  the  new  certificate  is- 
sued to  him. 

Form  4.* 

Q.'jy.  .  The  fourth  form  is,  thought  to  be,  the  simplest  and 
most  practical.  It  meets  every  requirement;  is  simple,  self- 
explanatory  and  easily  understood  by  those  who  know  noth- 
ing about  book-keeping.  It  tells  at  a  glance  how  much  stock 
anybody  holds,  without  having  to  wait  to  figure  it  up.  It 
shows  the  source  from  which  each  one  received  his  stock,  how 
many  shares  each  one  subscribed  for,  how  many  each  one  re- 
ceived by  transfer,  and  from  whom  they  received  them,  how 
many  shares  each  one  disposed  of  and  how,  whether  by  for- 
feiture or  transfer,  and  if  by  transfer,  to  whom  they  were 
transferred.  It  gives'  the  day  and  date  of  every  transaction, 
the  number  of  every  certificate  issued,  transferred  and  re- 
issued; in  fact  it  is  a  complete  history  of  every  transaction  of 
the  company's  stock  in  a  clear,  lucid,  intelligible  and  compact 
form.  This  form  of  ledger  deals  only  with  the  number  of 
shares  and  takes  no  account  of  their  value.  There  is  no  neces- 
sity for  the  Stock  Ledger  showing  the  value  of  the  shares, 
THAT  is  given  in  the  Articles  of  Incorporation  and  is  expressed 
on  the  face  of  every  certificate,  and  there  is  no  necessity  for 
showing  in  this  ledger  the  amount  the  stockholder  has  paid, 
or  the  amount  he  owes  on  his  stock.  It  simply  shows  the 
number  of  shares  every  stockholder  holds  or  has  subscribed 

*See  paragraph  281.  ; 


118  COEPOBATION    ACOOUNTINa 

for,  and  the  fact  of  their  subscription  renders  them  liable  for 
the  payment,  under  whatever  conditions  the  by-laws  state. 
An  eminent  authority  on  this  subject  (Joseph  H.  Goodwin) 
has  said:  ''Since  the  special  design  of  the  Stock  Ledger  is  to 
show  the  number  of  shares  held  by  each  stockholder,  the  issu- 
ing and  transferring  of  shares  is  hardly  a  matter  of  debit  and 
credit,  but  rather  a  matter  of  the  increase  and  decrease  of  the 
number  of  shares  held  by  each  stockholder."  That  is  the  point 
exactly;  the  corporation  is  not  the  stockholders'  debtor,  nor 
are  they  its  creditors',  as  previously  explained.  Some  account- 
ants credit  the  stockholders  in  the  Stock  Ledger  for  either  the 
par  value  of  the  stock  they  have  received,  or  the  amount  they 
have  actually  paid  on  it,  but  inasmuch  as  the  company  is  only 
contingently  liable  for  the  amount,  and  as  the  certificates  are 
evidence  of  the  stockholders'  interest  in  the  company  and  his 
right  to  share  in  the  division  of  its  residual  assets  in  case  of 
dissolution,  and  as  in  such  case  the  company  does  not  have  to 
redeem  its  certificates  at  their  face,  but  only  in  an  equitable 
and  ratable  manner,  and  as  it  may  pay  more  or  less  than  the 
face  value,  there  is  no  necessity  of  it  all ;  however,  there  is 
no  serious  objection  to  it,  excepting  that  it  is  a  waste  of  time 
and  energy  in  an  age  when  both  these  factors  count  for  so 
much.  The  best  method  is  to  debit  each  stockholder  for  the 
number  of  shares  he  receives,  and  not  the  amount,  and  to 
credit  him  with  the  number  he  parts  with,  and,  as  shown  in 
the  illustration,  his  account  will  always  show  at  a  glance  the 
number  of  shares  he  holds.  It  may  be  said  for  the  benefit  of 
the  critics  that  the  words  'Mebit"  and  "credit"  are  not  used 
here  in  their  exact  meaning;  but  rather  in  an  analogical  sense. 
"Debit"  is  the  correlative  of  credit  and  means  to  charge  with 
a  debt ;  and  of  course  the  stockholder  who  has  paid  for  his 
stock  is  not  debtor  to  the  company,  but  he  owes  the  return 
of  the  certificate  to  the  company  from  which  he  received  it  and 
he  must  pay  it  back  or  surrender  it  before  he  can  receive  a  re- 
turn of  his  capital,  and  it  logically  ensues  that  if  we  debit  him 
for  what  he  has  received  (the  certificate)  we  must  credit  him 
for  its  return. 

Opening  Ledger  (Form  4.) 

278.  Open  a  capital  stock  account  in  the  beginning  of  the 
book,  and  debit  it  by  a  single  entry  with  the  full  capital  of  the 
company.*  Whenever  any  stock  is  subscribed  for,  credit  this 
account  with  the  number  of  shares  subscribed,  and  charge 
each  stockholder  with  the  number  of  shares  he  receives.  When 

*See  paragraph  279. 


AND    COEPOEATION    LAW 


119* 


the  stock  is  all  subscribed  the  stock  account  will  balance 
and  the  total  of  the  stockholders'  accounts  will  equal  the  au- 
thorized number  of  shares,  and  by  multiplying  this  by  the 
value  of  the  stock  it  will  equal  the  amount  credited  to  Capital 
Stock  account  in  the  General  Ledger.  Of  course  the  Capital 
Stock  account  in  the  General  Ledger  may  only  represent  the 
"Paid-up  Capital"  of  the  company,  in  which  case  the  difference 
between  the  two  would  represent  the  amount  still  due  on  sub- 
scription. The  difference  between  the  two  sides  of  the  stock 
account  at  any  time,  will  represent  the  number  of  shares  un- 
subscribed, while  the  total  of  the  credits  on  this  account  must 
always  equal  the  total  of  the  individual  stockholders'  accounts. 
The  only  object  of  debiting  the  stock  account  with  the  number 
of  shares,  is  to  show  the  number  of  shares  the  company  is 
authorized  to  issue ;  this  may  be  omitted  altogether  if  it  be  de- 
sired to  show  the  Ledger  in  equilibrium.  But  we  have  seen 
how  a  trial  balance  can  be  taken  so  as  to  prove  the  accuracy 
of  the  work,  and  it  is  thought  best  to  let  the  debit  stand  on 
the  Stock  Account,  for  the  reason  given,  and  the  further  reason 
that  is  shows  at  a  glance  the  number  of  shares  remaining  un- 
sold. 


279. 

Stock  Account. 

Date 
1905 

Cert. 
No. 

To  Whom  Issued 

Other  Particulars 

Shares 

Debit 

Credit 

Balance 

Jan. 

1 

1 

John  Smith 

Authorized  Capital 

1,000 

250 

2 

Paul  Jones 

Trustee,  Paul  Jones,  Jr. 

100 

3 

Albert  Brown 

100 

4 

Thomas  White 

100 

5 

Charles  Green 

100 

350 

Feb. 

1 

Trans.to  Trea.  Stock  Act. 

350 

00 

1,000 

1,000 

280.  A  few  pages  are  headed  like  this  (the  heading  may 
be  done  with  a  pen)  in  the  beginning  of  the  book  for  the  Stock 
Account,  and  Treasury  Stock  Account  if  there  be  one.  The 
stock  is  written  up  from  the  Subscription  Book  or  Certificate 
Book  and  the  names  and  numbers  are  entered  here,  from 
whence  they  are  posted  to  the  respective  accounts  of  the 
stockholders.  The  Treasury  Stock*  Account  is  treated  exactly 

*Vide  paragraph  302  et  seq. 


120 


COEPOEATION    ACOOUNTINa 


as  this,  except  that  it  is  debited  whenever  stock  is  forfeited, 
and  the  name  of  the  forfeiter  given  in  the  explanation  column.* 

Stock  Ledger  Form  4 — Subscribers'  Account. 

281.  JOHN  SMITH. 


Date 
1905 

Certif. 
No 

Trans. 
No. 

By  Whom 
Transferred 

To  Whom 
Transferred 

No.  of 
Shares 
Issued 

No.  of 
Shares 
Trans  f. 

Bal. 

Shares 

Held 

Jan. 

1 

V 

Issued  from  Cap. Stock 

250 

10 

6 

1 

Albert  Brown 

50 

300 

Feb. 

1 

8 

2 

Dwyer  Gray 

100 

200 

Mar. 

1 

10 

Treas'ry  Stock 

50 

250 

282.  This  account  shows  that  John  Smith  received  250 
shares  of  the  original  issue  of  Stock,  that  Albert  Brown  trans- 
ferred 50  shares  to  him,  that  he  (Smith)  afterwards  trans- 
ferred 100  shares  to  Gray,  and  that  he  subsequently  acquired 
50  shares  of  Treasury  Stock.  It  shows  how  much  stock  he 
subscribed  for  originally,  how  much  he  afterwards  received, 
and  from  what  source,  and  how  much  he  disposed  of,  and  to 
whom,  and  how  many  shares  he  held  at  each  period.  As  fast 
as  one  can  turn  the  leaves  he  can  find  out  how  many  shares 
each  stockholder  has,  and  this  is  a  great  convenience  in  pre- 
paring for  an  election.  When  a  person  transfers  any  of  his 
stock  the  old  certificate  number  is  checked  off  and  the  new 
one  for  the  re-issue  is  inserted  opposite  the  transfer.  For  ex- 
ample, Smith  transfers  part  of  Certificate  No.  i  to  Gray,  Gray 
receives  Certificate  No.  7  for  the  part  transferred  to  him,  and 
Smith  receives  Certificate  No.  8  for  the  balance  of  Certificate 
No.  I  re-issued  to  him.  The  certificates  checked  off  are  can- 
celled and  those  not  checked  are  the  ones  he  holds,  which 
should  agree  with  the  aggregate  number  of  shares  shown  in 
the  "Balance"  column. 

283.  By  this  last  named  method  the  Journal  is  dispensed 
with  as  being  wholly  unnecessary,  the  stock  account  showing 
in  detail  the  names  of  all  subscribers  with  the  number  of 
shares  and  certificates  of  each.  The  correctness  of  this  can 
'be  proved  at  any  time  by  checking  it  against  the  stubs  of  the 
certificate  book.  Instead  of  the  Journal,  a  Transfer  Book  is 
used  for  the  purpose  of  recording  transfers  of  stock;  this  is 
sometimes  called  a  Transfer  Journal. 

*See  index  for  "Forfeited  Shares." 


284. 


AND    COEPORATION    LAW 
Transfer  Record. 


121 


Surrendered  to 

Folio 

Surrendered  by 

Surrendered 

Re-issued 

For  value  received  , hereby 

surrender. .  to 

Cert. 
No. 

No. 
Shs. 

Cert. 
No. 

No. 
Shs. 

sha 

res  of  Certificate  No 

tal  Stock  of 

01  tne  c;api 

r^A    Vlo^^K-.T      0  11  ft-l /-.«-; /rr^      i-U^      z^^*. 

cellation  of  said  Certificate  and  the  issue 

of    new    Certificate to   the  following- 
person  

Transfer  No. 

Pag-e  of  Register 

shares shares 

Dated Signed 

285.  A  transfer  book  is  a  very  necessary  part  of  the  office 
^equipment  of  a  well  regulated  corporation,*  especially  so  where 
stock  is  required  to  be  transferred  either  in  person  of  the 
owner,  or  by  attorney.  The  endorsement  on  the  certificate 
is  an  authorization  to  somebody  to  make  the  transfer ;  that  is, 
to  sign  the  transfer  book,  and  the  doing  so  is  to  the  corpora- 
tion an  important  act  in  the  concatenation  of  circumstances 
attending  a  proper  transfer. 

Form  5. 

286.  For  those  who  prefer  to  have  money  columns'  in  the 
Stock  Ledger,  a  form  is  herewith  given  which  should  meet 
their  requirements  and  at  the  same  time  have  the  advantages 
which  Form  No.  4  possesses. 

*Vide  paragraph  261. 


122 


COEPOEATION    ACCOUNTINa 


Stock  Ledger. — Form  5. 

JOHN  SMITH. 


Date 

■£  6 
5^ 

CO 

1^ 

By  Whom 
Transferred 

To  Whom 
Transferred 

and  other 
Particulars 

Folio 

Debit 

Credit 

Balance 

1905 

Shs 

Amt 

Shs 

Amt. 

Shs 

Amt. 

Oct. 

Nov. 
Dec. 

1 

10 
10 

1 
1 

1  7 
6 

8 
10 

1 

2 

Capital  Stock 
Albert  Brown 

Treas'ry  Stock 

Istlnstal   60% 
Transfer  to 
Dwyer  Gray 

1 

2 

C.B. 

10 

250 
50 

50 

2500 
250 

500 

00 
00 

00 

100 

1250 
500 

00 

00 

250 
300 

200 
250 

2500 
2750 
1500 
1000 
1500 

00 
00 
00 
00 
00 

287.  With  this  form,  the  stockholder  is  charged  for  the 
par  vahie  of  his  stock  at  the  time  of  his  subscription,  and  he 
is'  credited  in  the  money  column  for  subsequent  payments. 
The  "shares"  column  show  the  number  of  his  shares,  and  the 
"money"  columns  show  the  amount  he  has  paid  on  it  and  the 
balance  he  owes,  if  any.  If  he  transfers  any  of  his  stock  he 
is  credited  for  the  number  of  shares  transferred,  and  also  the 
amount  due  on  that  number  at  the  time  of  transfer,  but,  let 
it  be  understood,  a  person  cannot  transfer  his  stock  in  a  cor- 
poration while  he  is  owing  the  corporation  on  that  stock,  with- 
out its  consent  and  the  assumption  of  his  liability  by  the 
transferee.  In  the  foregoing  illustration  the  par  value  of  the 
stock  is  placed  at  $10  per  share  and  Brown  transfers  50  shares 
to  Smith  on  which  he  has  already  paid  the  company  50  per 
cent,  Smith  is  thereupon  debited  with  the  50  shares  and  the 
balance,  so  he  pays  the  first  instalment  of  50  per  cent  on  his 
certificate  No.  i.  Later  he  transfers  100  shares  of  this  cer- 
tificate to  Gray,  when  he  is  credited  for  the  50  shares  he  trans- 
fers and  the  balance  he  owed  the  company  on  them  at  the 
time  of  transfer,  namely  50  per  cent  or  $1250.  The  party  to 
whom  he  has  transferred  the  shares  is  debited  with  the  num- 
ber of  shares  and  the  balance  due  the  company  on  them, 
namely  $1250.  When  the  stock  is  all  paid  for  the  money 
columns  will  balance,  and  then  the  Ledger  is  kept  in  the  same 
way  as  Form  No.  4.  In  case  assessments  are  levied  at  some 
subsequent  time,  the  money  columns  may,  if  desired,  be  again 
called  into  requisition.    See  paragraph  274. 


CHAPTER  VIII. 

Theory  and  Nomenclature  of  Corporation  Accounts  and 
Corporate  Terms. — Definitions  and  Differentiations  of  Every 
Class  of  Stocks  and  Bonds  Known. — Funds  vs.  Accounts. — 
Sinking  Funds  and  Other  Funds  and  How  to  Construct  Them; 
Three  Different  Methods. — Trusts,  Syndicates,  Holding  Com- 
panies, Voting  Trusts. — Trading  Statements,  Statements  of 
Affairs  and  Condition,  Realization  and  Liquidation  Accounts, 
Deficiency  Accounts. — Theory  of  Diminishing  Values,  Etc. 


Capital  Stock. 


288.  There  exists  in  the  minds  of  many  a  confused  idea 
of  the  relation  between  Capital  and  Capital  Stock.  They  are 
regarded  by  many  as  synonymous  terms,  while  many  others 
can  not  differentiate  the  two  terms.  Capital,  broadly  speak- 
ing, is  wealth  or  means  employed  to  produce  wealth  or  things 
of  value.  When  so  employed  it  is  called  "invested"  or  "active 
capital."  It  is  subdivided  into  two  classes,  "Fixed  Capital," 
such  as  building,  plant,  machinery,  etc.,  or  the  things  that  are 
used  in  production,  the  things  acted  on  to  produce ;  and  "Cir- 
culating Capital,"  such  as  money,  food,  supplies,  etc.,  the 
things  acting  on  the  productive  agencies,  the  means  employed 
to  set  the  productive  machinery  in  motion. 

289.  The  capital  stock  of  a  corporation  is  the  fixed,  deter- 
minate, nominal  value  of  share  interest  which  it  is  authorized 
to  sell  or  exchange  for  things  of  equal  value — at  least  that  is 
the  theory  of  capital  stock;  but  the  "capital  stock"  and  the 
''paid-up  capital"  are  two  distinct  things.  Paid-up  capital  is 
the  sum  total  in  money  or  money  equivalent  contributed  by 
the  stockholders  of  a  corporation  to  a  common  fund  to  form  a 
basis  of  capital  on  which  the  corporation  commences  business. 
This  fund  is  the  measure  of  the  company's  assets  at  the  start 
as  well  as  the  measure  of  its  liabilities ;  hence  we  see  that  it 
commences  its  existence  as  the  fiduciary  agent  of  the  stock- 
holders, becoming  liable,  in  a  certain  sense,  for  the  care  and 
investment  of  this  fund  and  its  return  to  the  contributors  or 
their  assigns,  in  an  enhanced  or  reduced  condition,  at  the  close 


124  COBPOEATION    ACCOUNTINO 

of  its  corporate  career.  Whenever  the  net  assets'  of  a  corpor- 
ation fall  below  its  paid-up  capital  it  is  insolvent,  and  its  cap- 
ital is  said  to  be  impaired.  The  paid-up  capital,  or  subscribed 
capital  (if  all  subscriptions  are  not  paid),  is  regarded  as  a 
guarantee  fund  contributed  by  the  stockholders  for  the  secur- 
ity of  the  company's  creditors,  and  it  must  never  be  impaired. 
It  must  stand  between  the  creditors  and  loss  at  all  times.  It 
is  the  margin  of  protection  which  the  creditors  of  a  corpora- 
tion have  against  its  failure,  the  extreme  limit  of  the  loss  it 
may  sustain  and  pay  all  creditors  out  of  its  residual  assets. 
From-  the  foregoing  remarks  we  can  easily  deduce  these  facts : 
The  capital  of  a  company  is  anything  of  value  which  the  com- 
pany owns  in  excess  of  its  liabilities.  The  capital  stock  of  a 
company  (subscribed  or  paid  up)  is  the  amount  supplied,  or 
to  be  supplied,  by  the  stockholders'  to  finance  the  company 
and  give  it  a  basis  of  credit;  it  may  be  more  or  less  than  its 
capital. 

Certificate  of  Stock. 

290.  A  stock  certificate  is  an  evidence  of  ownership  of  the 
stock  of  the  company  named  therein;  it  is  simply  a  paper 
signed  by  the  president  and  secretary,  or  president  and  treas- 
urer of  a  corporation,  certifying  that  the  owner  thereof  is  en- 
titled to  so  many  shares  of  stock  of  the  corporation  as  are 
represented  by  the  face  of  the  certificate.  The  nominal  value 
of  the  stock  is  stated  on  the  face  of  the  certificate,  but  that 
does  not  mean  that  the  holder  thereof  is  the  creditor  of  the  cor- 
poration to  that  amount,  nor  to  any  amount."^  The  company 
is  under  no  obligations  to  redeem  its  certificates;  in  fact,  it 
cannot  buy  up  its  own  stock  unless  under  certain  conditions 
which  are  defined  later.^  A  certificate  is  not  negotiable  in  the 
sense  that  a  check,  draft,  or  promissory  note  is.  It  may  be 
transferred  for  any  consideration,  either  by  a  simple  endorse- 
ment, if  the  by-laws  so  allow,  or  by  filling  in  and  signing  a 
regular  transfer,  either  in  person  or  by  attorney.  A  corpora- 
tion does  not  recognize  a  transfer  until  it  is  entered  on  its 
books,  and  in  most  corporations  the  books  are  closed  against 
transfers  a  certain  length  of  time  before  elections,  and,  after 
declaring  and  before  paying  dividends. 

Common  Stock. 

291.  In  every  corporation  the  capital  stock  is  divided  into 

a  certain  number  of  shares  of  a  certain  par,  or  nominal,  value. 

Where  there  is  only  one  kind  of  stock  it  is  called  ''common 

*Vide  paragraph  211. 

iVide  paragraph  302 — Sec.  5. 


AND    CORPOEATION    LAW  125 

stock."  In  such  a  case  every  share  has  the  same  voting  power,* 
the  same  earning  capacity,  the  same  obligations,  the  same 
common  attributes,  hence  the  name  "common  stock."  "Gen- 
eral stock"  and  "common  stock"  are  interchangeable  terms. 
The  ownership  of  stock  is  evidenced  by  certificates,  scrip,  or 
contract. 

Preferred  Stock. 

292.  Preferred  stock  differs  from  the  ordinary  stock  in 
this,  that  a  certain  preferential  dividend  shall  be  paid  upon  it 
before  any  dividend  can  be  paid  upon  the  6rdinary  stock,  e.  g., 
"five  per  cent  preferred  stock"  means  that  it  is  entitled  to  five 
per  cent  dividend  before  any  dividend  can  be  paid  on  the  com- 
mon stock ;  but  it  does  not  mean  that  it  must  be  paid  on  it  if 
the  company  does  not  earn  sufficient  profits  to  justify  the  pay- 
ment of  that  amount.^  It  may  pay  two  per  cent,  or  no  per  cent, 
and  still  the  owner  of  preferred  stock  has"  no  claim  against  the 
company ;  he  has  the  simple  right  to  first  dividends  out  of  the 
profits.  The  common  stock  receives  no  dividend  until  the  pre- 
ferred stock  is  satisfied,  and  then  only  such  dividend  as  the 
directors  shall  decide  is  prudent  to  pay  out  of  the  balance  of 
the  profits.  Preferred  stock  is  usually  given  to  secure  some 
obligation  of  the  company,  although  many  companies  issue 
two  or  more  kinds  of  stock  at  the  time  of  organization.  They 
do  this  in  order  to  secure  capital  quickly  by  offering  special 
inducements  to  the  purchasers  of  a  limited  number  of  shares. 
Again,  a  corporation  may  have  excellent  prospects  and  still' 
be  crippled  financially  and  in  order  to  obtain  "working  capital" 
it  issues'  a  certain  amount  of  stock  which  it  sells  on  condition 
that  it  will  receive  dividends  in  preference  to  the  original  issue 
of  stock. 

293.  Ordinarily  speaking  the  owners  of  preferred  stock 
have  the  same  right  to  vote  it  as  have  the  owners  of  common 
stock ;  but  there  is  frequently  an  inhibition  against  this  in  the 
by-laws,  on  the  theory  that  the  owners  of  the  common  stock 
yield  up  certain  dividends'  to  the  owners  of  preferred  before 
claiming  any  for  themselves;  and  inasmuch  as  their  claim  or 
show  to  dividends  depends  on  good  management,  they  can  be 
relied  on  in  self-interest  to  use  every  means  to  earn  the  pre- 
ferred dividend  and  more ;  whereas,  the  preferred  stockholders 
might  be  satisfied  with  earning  a  dividend  for  themselves  only. 

294.  The  following  is  a  short  form  of  preferred  stock  cer- 
tificate : 

*Vide  paragrapli  293.  ~ 

iVide  paragraph  297. 


126 


CORPORATION   ACCOUNTING 


No 5%  Preferred  Stock  A 

THE  BLANK  RAILWAY  COMPANY 

This  is  to  Certify  that 

is  the  owner  of  Ten  Shares  of  the  nominal  value  of 
$100.00  each  in  the  5%  Preferred  Stock  A  of 

The  Bi,ank  RAII.WAY  Company 
a  corporation  org-anized  and  existing  under  the  laws 

of  the  State  of ,  United  States  of 

America;  transferrable  only  on  the  books  of  the  Com- 
pany in  person  or  by  attorney  on  return  and  surrender 
of  this 'certificate  properly  endorsed;  when  a  certifi- 
cate or  certificates  of  like  tenor  will  be  issued  to  the 
assig"nee. 

IN   WITNESS    WHEiRE^OF  the   President   and 

Treasurer  have  hereunto  sig-ned  their 
(seal)       names  and  caused  the  corporate  seal  to 

be  affixed  hereto  this day  of.  ,  .190. . 

Treas.  Sec'y 


Cumulative  Preferred  Stock. 

295.  This  is  a  stock  which  is  entitled  to  "cumulative  divi- 
dends," that  is  to  say,  if  the  dividends  are  not  paid  for  a  cer- 
tain period  of  time  the  accumulated  amount  is  still  due  to  the 
holders  of  this  kind  of  stock,  and  these  back  dividends  must 
be  paid  before  those  due  later  on  are  taken  care  of.  In  other 
words,  if  a  company  misses  or  passes  a  dividend  period  it  does 
not  escape  the  payment  of  that  dividend  or  several  dividends. 
It  must,  when  it  is  in  a  condition  to  do  so,  pay  the  accumula- 
tion of  the  passed  dividends.  If  a  company  is  "over  capital- 
ized" and  it  is  obvious  that  it  cannot  pay  the  preferred  divi- 
dend, the  logical  and  reasonable  thing  to  do  is  to  reduce  the 
preferred  stock  to  common  stock.  It  is  also  a  common  prac- 
tice to  convert  preferred  stock  into  bonds  at  a  lower  rate  of 
interest,  as  well  as  to  convert  bonds  into  common  stock.  The 
manner  of  making  these  conversions  and  the  reason  for  them 
will  be  explained  further  on.    See  paragraphs  349  and  350. 

Non-Cumulative  Preferred  Stock. 

296.  The  meaning  of  this  title  is  obvious,  signifying  that 
the  dividends  are  to  be  paid  if  earned  by  the  company;  but  if 
there  is  a  lapse  in  the  dividends  by  reason  of  the  company  not 
earning  sufficient  to  pay  them,  they  do  not  cumulate,  and  the 
stockholder  and  not  the  company  is  the  loser — see  definition 
of  "Preferred  Stock."  In  both  these  stocks  the  amount  of  the 
preferential  dividend  is  stated  on  the  face  of  the  certificate. 


AND   CORPORATION  LAW  127 

Guaranteed  Stock. 

297.  This  is  practically  the  same  as  ''cumulative  stock/* 
It  is  stock  on  which  a  certain  dividend  is  guaranteed;"^  and 
must  be  paid  before  dividends  are  paid  on  any  other  stock  of 
the  company.  It  is  an  obligation  of  the  company  which  does 
not  outlaw,  and  all  the  overdue  dividends  must  be  paid  by  the 
company  whenever  it  is  in  a  condition  to  pay  them.  It  must 
be  understood,  of  course,  that  all  dividends  are  contingent  on 
being  earned;  and  no  dividend — no  matter  how  preferred  or 
guaranteed — can  ever  become  anything  but  a  claim  on  the 
profits.  They  do  not  exist  as  a  liability  against  the  assets  of 
the  company  in  case  of  failure  or  dissolution. 

298.  All  stock  certificates,  where  there  is  more  than  one 
kind,  should  have  the  name  of  the  stock  which  they  represent 
printed  on  the  face  thereof;  that  is,  "preferred  stock,"  "guar- 
anteed stock,"  or  whatever  it  may  be.  This  designation  is 
usually  tinted  on  the  certificate  in  very  bold  type. 

Increasing  the  Preference. 

299.  If  a  corporation  be  very  successful  the  common  stock 
may  pay  better  dividends'  than  the  preferred  or  other  favored 
stock ;  that  is,  after  the  preferred  dividend  has  been  paid  there 
may  be  sufficient  profits  left  to  pay  a  much  larger  dividend  on 
the  common  stock ;  but  to  guard  against  this,  and  as  an  extra 
inducement  to  the  purchaser  of  preferred  stock,  some  com- 
panies insert  a  clause  in  their  by-laws  to  the  effect  that:  "In 
addition  to  the  preferred  or  guaranteed  dividend,  the  preferred 
or  guaranteed  stock  shall  also  receive  an  amount  equal  to  one- 
half  of  the  dividends'  paid  on  the  common  stock"  or  some  such 
or  even  greater  concession. 

Deferred  Stock. 

300.  This  is  the  antithesis  of  preferred  stock.  As  pre- 
ferred stock  has  the  preference  in  the  profits  of  the  company, 
deferred  stock  has  no  claim  on  the  profits  for  a  certain  period 
of  time,  until  the  happening  of  a  certain  event,  or  until  the 
common  stock  shall  have  received  certain  dividends. 

Non-Assessable  Stock. 

301.  This  means  that  the  stock  shall  not  be  assessed  for 
any  purpose  after  the  par  value  of  the  shares  shall  have  been 

*Soinetimes  "holding  companies"  guarantee  dividends  on  the  stock 
of   subsidiary   companies.    Vide  paragraph  468. 


128  CORPORATION    ACCOUNTING 

paid.  The  phrase,  however,  is  a  misnomer  in  this  and  some 
other  states,*  as  the  stock  can  be  assessed  at  any  time  to  pay 
the  just  debts  of  the  company ;  moreover  it  is  better  to  submit 
to  an  assessment  for  that  purpose  than  to  become  defendant 
in  a  lawsuit  for  one's  share  of  the  debts.  This  stock  should 
have  the  phrase  "Full-paid  Non-assessable"  printed  in  bold 
letters  on  the  face  of  the  certificates ;  that  is,  in  those  states 
where  stock  is  non-assessable  when  the  par  value  is  paid ;  then 
the  purchaser  for  value  and  in  good  faith  can  not  be  held  for 
assessments  in  case  the  stock  was  not  fully  paid  for;  nor  can 
he  be  held  liable  by  the  creditors  of  the  company  in  case  of 
failure. 

Treasury  Stock. 

302.  There  is  no  class  or  sub-division  of  stock  so  much 
and  so  ill  defined  as  "Treasury  Stock. '  Following  is  a  list  of 
the  generally  accepted  definitions  : 

1.  The  unsubscribed  stock  of  a  corporation,  after  the  sale 
of  stock  closes,  or  the  amount  remaining  after  the  incorpor- 
ators have  received  their  stock. 

2.  The  amount  of  stock  that  the  incorporators  or  promot- 
■^  ers  reserve  to  be  sold  at  some  future  time  as  the  needs  of  the 

company  may  require. 

3.  Stock  donated  or  given  as  a  bonus  to  the  company  by 
one  or  more  members  to  be  sold  for  the  purpose  of  increasing 
its  working  capital. 

4.  Stock  forfeited  to  the  company.  For  example,  if  stock 
is  sold  on  the  instalment  plan  and  the  purchaser  fails  to  pay 
his  instalments  he  forfeits  his  stock  subject  to  the  conditions 
laid  down  in  the  by-laws,  (that  is  where  the  state  law  author- 
izes the  insertion  of  such  a  provision)  ;  this  then  becomes 
treasury  stock. 

5.  Stock  repurchased  by  the  company;  this,  however,  is 
'     unlawful,  as  corporations  are  not  allowed  to  speculate  in  their 

own  stock ;  they  may,  however,  and  must,  in  order  to  acquire 
legal  title  to  it,  purchase  their  own  stock  at  delinquent  sales 
provided  there  is  no  other  bidder. 

6.  Some  accountants  go  so  far  as  to  designate  the  unpaid 
subscribed  stock  treasury  stock. 

303.  These  are  the  generally  accepted  definitions ;  now  for 
an  analysis:  The  theory  of  "treasury  stock"  is  that  it  is  in 
the  treasury  of  the  company  or  the  hands  of  the  treasurer.  The 
term,  as  applied  to  stock,  is  not  exact  but  analogous.    A  good 

*Vide  paragraph  156. 


AND   CORPORATION   LAW  129 

definition  of  "treasury'*  is  a  repository  of  treasure  or  wealth ; 
and  if  we  apply  this  definition  we  must  exclude  from  the  fore- 
going definitions  all  those  that  are  not  in  themselves  a  treasure 
or  asset  of  the  company.  It  is  clear  that  one  and  two  are  not 
of  this  class ;  they  are  not  an  asset  out  are  issued  against  what 
becomes  an  asset ;  their  issue  involves  the  creation  of  a  liabil- 
ity in  proportion  to  the  asset  exchanged  for  them:  Number 
three  is  clearly  an  asset ;  it  was  issued  against  an  asset  in  the 
first  place,  but  the  liability  thus  created  was  extinguished 
when  it  was  donated  back  to  the  company ;  therefore  the  com- 
pany has  acquired  the  equivalent  asset  for  nothing,  and  this 
stock  can  be  sold  and  the  company's  treasury  replenished 
without  increasing  the  capital  liability  beyond  its  original 
amount ;  in  other  words,  it  is  a  clear  gain  to  the  company.  In 
numbers  four  and  five  there  is  a  gain  proportionate  to  the  lia- 
bility extinguished  and  the  company  acquires  the  stock  for  the 
purpose  of  sale  again.  The  actual  asset  value  of  this  stock  is 
the  amount  above  par  which  the  company  receives  on  the  two 
sales,  (if  the  stock  is  resold.) 

304.  Number  six  can  not  in  any  sense  be  classed  as  treas- 
ury stock.  It  is  neither  unissued,  donated  nor  forfeited.  The 
deduction  to  be  drawn  from  the  foregoing  analysis  is :  Treas- 
ury stock,  properly  speaking,  is  that  portion  of  the  paid  up 
stock  of  a  company  which  reverts  to  the  "Treasury"  and 
thereby  reduces  the  company's  liabilities  wtihout  impairing 
its  assets;  hence  it  is  that  "donated"  stock  is  unqualifiedly 
treasury  stock;  and  that  "forfeited"  stock  and  "repurchased" 
stock  are,  in  a  measure,  treasury  stock.  The  proper  way  to 
do  with  these  latter  two  classes  would  be  to  take  into  Treas- 
ury Stock  Account  a  sufficient  number  of  shares  to  equalize, 
at  par,  the  actual  gain  to  the  company,  the  balance  going  back 
into  Capital  Stock  Account.  The  reason  for  this  is :  All  stock 
is  supposed  to  be  sold  for  not  less  than  par;  liability  exists  in 
every  case  up  to  that  amount,  as  to  creditors,  but  stock  once 
sold  and  paid  for,  (as  the  treasury  stock  just  described)  can 
be  sold  next  time  at  a  discount  if  desired.  Another  reason  is 
that  this  stock  is  considered  issued  and  outstanding,  and  as 
such  is  subject  to  taxation  in  some  states. 

305.  Supose  that  a  company  received  a  bonus  of  $10,000 
worth  of  stock  from  the  stockholders,  for  the  purpose  of  sell- 
ing it  to  acquire  new  capital,  what  should  be  the  procedure, 
and  what  the  entries? 

306.  The  donors  should  assign  the  stock  to  the  treasurer 
of  the  company  in  his  official  capacity;  then  the  company  ac- 
quires title  to  it,  places  it  in  the  treasury,  so  to  speak,  and  has 


130  CORPORATION    ACCOUNTING 

it  for  sale.  In  double  entry  bookkeeping  every  debit  must 
have  a  credit  or  every  asset  a  corresponding  liability,  there- 
fore the  entry  would  be : 

Treasury  Stock  Dr.  $10,000 

To  Working  Capital  or  Stock 

Donation  Account  $10,000 

for  10,000  shares  donated  to  raise 
working  capital. 

307.  As  this  stock  is  sold  the  treasury  stock  is  credited, 
and  when  it  is  all  sold  the  Treasury  Stock  Account  will  bal- 
ance and  the  Working  Capital  Account  will  represent  the 
same  asset  in  a  new  form,  viz :  Cash ;  that  is,  if  the  treasury 
stock  has  been  sold  at  par.  If  the  treasury  stock  has  been 
sold  at  a  discount  of,  say,  10%,  make  this  entry  to  close  Treas- 
ury Stock  Acocunt : 

Working  Capital  Dr.  $1000 

To  Treasury  Stock  $1000 

for  10%  discount  on  stock  sold  to 
raise  working  capital. 

If  it  has  been  sold  at  a  premium  make  this  entry : 

Stock  Premium  Account  Dr.  $1000 

To  Working  Capital  $1000 

Treasury  Stock  sold  at  a  premium  of 
10%  to  increase  working  capital. 

308.  Now  we  see  from  the  foregoing  that  the  company 
has  come  into  possession  of  $9000,  $10,000  or  $11,000,  as  the 
case  may  be,  for  which  it  actually  gave  nothing  in  exchange. 
This  is  a  clear  gain  to  the  company,  but  it  must  not  be  cred- 
ited to  Profit  &  Loss,  for  the  reason  that  the  company  has 
not  earned  it.  It  is  no  part  of  the  revenues  of  the  business. 
It  is  a  capital  accretion  rather  than  a  revenue  accretion  and 
it  must  not  show  in  the  Profit  &  Loss  Account  or  the  Balance 
Sheet  as  a  profit ;  because  this  would  be  very  misleading,  in- 
asmuch as  it  has  not  been  earned.  The  best  way  to  do  then 
is  this :  Allow  "Working  Capital"  to  stand  on  the  books  until 
the  close  of  the  fiscal  perior,  distributing  all  disbursements 
under  proper  "account  headings,"  so  as  to  show  the  correct 
cost  of  operating,  and  then  make  this  entry: 

Working  Capital  $10,000 

To  Surplus  Account  $10,000 

for  sale  of  donated  stock. 
*Vide  paragraphs  688  to  692. 


AND   CORPORATION  LAW  131 

309.  This  will  show  that  the  gain  was  an  extraordinary- 
one  and  not  a  profit  on  operating.  If  the  Profit  &  Loss  Ac- 
count shows  a  loss,  charge  it  against  Surplus  Account  thus: 

Surplus  Account 

To  Profit  &  Loss. 
Net  loss  on  operating  for  the  fiscal  period. 

The  company  will  still  be  solvent  to  the  amount  of  the  Sur- 
plus Account. 

310.  Some  may  object  to  closing  Working  Capital  into 
Surplus,  as  it  might  appear  to  some  of  the  stockholders  that 
this  surplus  was  available  for  dividends  when  the  earnings  of 
the  company  would  not  justify  a  dividend.  There  is  no  real 
merit  in  such  an  objection.  In  the  first  place,  the  law  inva- 
riably provides  that  dividends  shall  be  paid  only  out  of  sur- 
plus profits,  and  in  the  next  place  a  good  surplus  should  al- 
ways be  maintained  to  guard  against  losses  and  insure  the 
solvency  of  a  company. 

Watered  Stock. 

311.  This  is  an  increase  of  the  capital  stock  of  a  corpora- 
tion without  a  corresponding  increase  in  the  assets  of  the 
company.  It  is  usually  distributed  among  the  stockholders 
pro  rata,  and  is  done  for  the  purpose  of  defrauding  the  state 
or  municipality.  Some  states  and  municipalities  require  cer- 
tain corporations  to  pay  all  of  their  excess  of  profits,  over 
a  certain  fixed  rate,  to  the  state  or  municipality  or  they  are 
compelled  to  reduce  their  charges.  In  other  words  the  state 
fixes  the  limit  of  their  earnings,  and  in  order  to  defraud  the 
state  or  municipality  and  reap  all  the  profits  they  water  the 
stock,  e.  g.,  suppose  a  water  company  with  an  authorized  cap- 
ital of  $100,000  is  earning  10  per  cent  profit  when  the  law  al- 
lows it  to  earn  but  5  per  cent.  It  simply  increases  its  capital 
stock  to  $200,000,  after  which  its  earnings  will  appear  but  5 
per  cent  on  its*  capital  of  $200,000.  By  this  simple  process  the 
state  or  municipality  is  defrauded  of  its  share  and  the  stock- 
holders are  correspondingly  benefitted.  These  corporations 
are  required  to  make  a  public  statement  of  their  earnings,  and, 
by  the  watering  process,  the  dear  people  are  led  to  believe' 
that  those  much  abused  corporations  are  earning  but  small 
dividends  on  their  investment.  The  public  is  enlightened  as 
to  their  receipts  and  expenditures,  but  is  kept  in  the  dark  as 
to  their  actual  percentage  of  profit. 

312.  A  terse  and  exact  definition  of  "Watered  Stock"  is: 


132  CORPORATION    ACCOUNTING 

Stock  acquired  for  less  than  an  equivalent  exchange  of  value. 
This  makes  promoters  stock  and  the  stock  of  the  fellows  v^ho 
get  in  on  the  "ground  floor/'*  as  well  as  the  stock  that  is 
issued  against  inflated  values,  "Watered  Stock." 

313.  Some  of  these  people  who  get  in  on  the  ground  floor 
assert  that  it  is  just  as  legitimate  to  capitalize  the  earning  ca- 
pacity of  a  business  as  it  is  to  capitalize  its  tangible  assets 
and  they  resent  designating  this  over-capitalization  as 
"Watered  Stock,"  e.  g.  If  a  company  with  tangible  assets  of 
$1,000,000  is  capable  of  earning  10%  on  this  capital,  and  5^ 
is  regarded  as  a  fair  return  on  capital,  they  consider  it  proper 
to  capitalize  the  company  for  $2,000,000.  There  may  be  times 
when  this  is  justified  but  more  frequently  it  is  not  and  if  the 
speculative  earning  capacity  does  not  materialize  and  the 
company  should  be  forced  into  liquidation,  or  forced  to  reor- 
ganize, the  pressure  will  force  the  water  out  sure  enough  be- 
cause the  assets  can  not  support  the  stock.  Vide  paragraph 
842. 

Clandestine  Stock. 

314.  This  is  a  secret  increase  of  the  capital  stock  with- 
out the  authority  of  the  state.  It  differs  from  watered  stock 
in  two  ways.  In  the  latter  case  the  stock  is  increased  by  legal 
process,  to  serve  an  illegal  purpose.  In  the  former  case,  an 
increase  of  stock  is  not  legally  sought,  for  obvious  reasons. 
Watered  stock  as  we  have  seen  is'  issued  for  the  purpose  of 
defrauding  the  state  or  municipality  and  sometimes  the  pur- 
chasers ;  while  clandestine  stock  is  issued  solely  for  the  pur- 
pose of  defrauding  its  purchasers  and  enriching  certain  indi- 
viduals, e.  g.  A  corporation  is  known  to  have  a  good  surplus 
and  it  is  paying  good  dividends,  its  stock  is  valuable  and 
easily  commands  a  premium;  the  directors  being  daring  and 
unscrupulous  men  decide  upon  a  secret  issue  of  stock  which 
is  distributed  among  themselves  and  then  offered  for  sale ;  the 
stock  easily  sells  on  its  reputation  and  the  thieves  pocket  the 
spoils.  This  is  a  risky  business,  but  men  have  been  known 
to  engage  in  it ;  and,  there  is  the  case  of  certain  railway  mag- 
nates in  New  York  some  years  ago  who,  upon  finding  their 
stock  being  bought  up  by  a  rival  company  for  the  purpose  of 
controlling  or  absorbing  them,  issued  stock  as  fast  as  a  print- 
ing press  could  run,  until  the  trick  was  discovered.  It  is 
hardly  necessary  to  say  that  a  company  found  guilty  of  this 
would  forfeit  its  charter  to  the  state,  and  the  directors  and  of- 
ficers who  participated  in  such  a  fraud  would  be  held  jointly 
and  severally  liable. 

*See  chapter  XXVn: 


AND   CORPORATION   LAW  133 

Assenting  and  Non-Assenting  Stock. 

315.  There  is  an  old  saw  that  "necessity  is  the  mother 
of  invention,"  and  indeed  these  terms  are  the  offspring  of 
necessity.  When  the  Westinghouse  Electric  and  Manufac- 
turing Co.  was  reorganized  about  fifteen  years  ago,  it  was 
necessary  to  obtain  the  assent  or  consent  of  the  stockholders- 
to  the  plan  of  reorganization.  The  vast  majority  of.  the  stock- 
holders consented  to  the  plan,  but  there  were  a  few  who 
either  could  not  be  located  or  who  refused  or  neglected  to 
give  their  written  consent  to  the  reorganization.  In  order  tO' 
avoid  delay  and  to  legally  carry  out  the  reorganization,  it  be- 
came necessary  to  issue  two  classes  of  stocks,  one  designated 
^'Assenting  Stock"  and  representing  those  who  had  con- 
sented, the  other  designated  "Non-assenting  Stock"  and  rep- 
resenting those  who  had  not  consented.  In  all  other  respects' 
these  stocks  are  identical  and  may  be  compared  to  what  is- 
known  as  common  stock.  Out  of  $21,000,000  worth  of  stock 
there  is  at  this  time  (August  i,  1905)  only  outstanding  $3,650 
worth  of  non-assenting  stock. 

Founders'  Shares. 

316.  The  general  corporation  act  of  New  Jersey  author- 
izes the  issue  of  what  are  known  as  "founders  shares."  This 
phrase  and  classification  is  borrowed  from  the  English.  A 
corporation  is  formed  having  a  certain  number  of  shares  of 
preferred  and  common  stock.  Of  the  common  stock  a  fixed 
percentage  is  set  aside,  designated  as  above  and  issued  to  the 
"founders'"  of  the  enterprise  or  to  some  eminent  financiers  or 
titled  gentlemen  for  the  use  of  their  names  in  connection  with 
the  enterprise.  These  shares,  by  regulation,  have  enormous 
dividend  rights  after  the  preferred  dividends  are  paid — some- 
times 50%  of  the  entire'  common  stock  dividend.  But  few 
companies  have  been  organized  in  this  country  on  such  a 
basis  and  their  legality  has  never  been  adjudged  by  an  Amer- 
ican court. 

Bonds. 

317.  It  is  one  of  the  functions  of  a  corporation  to  issue 
bonds.  The  difference  between  a  corporation  issuing  bonds 
and  a  government  issuing  bonds  lies  in  this:  A  government 
issues  and  sells  its  bonds  on  the  faith  the  purchasers  have  in 
the  stability  of  the  government;  but  corporation  bonds  are 
usually  issued  against  tangible  assets.  The'  simplest  defini- 
tion of  a  bond  is  "an  obligation,"  and  the  outstanding  bonds- 


134  CORPORATION    ACCOUNTING 

of  a  corporation  are  so  much  outstanding  obligations  which 
it  has  contracted  to  meet  at  certain  times.  These  future  ob- 
ligations are  sold  as  of  the  present,  bearing  interest  until  date 
of  maturity.  The  amount  of  the  obligation  is  the  face  value 
of  the  bonds  (regardless  of  what  they  sell  for),  plus  the  pe- 
riodical recurring  interest.  To  secure  the  payment  of  these 
obligations  or  bonds  the  corporation  must  execute  a  mortgage 
or  trust  deed,  or  collateral  trust  agreement,  to  some  trustee 
or  trustees,  to  be  held  by  them  as  security  for  the  payment 
of  the  bonds  at  maturity  and  interest  at  stated  periods.  If 
the  bonds  are  not  paid  at  maturity,  or  if  default  be  made  in 
the  payment  of  the  interest,  the  trustees  foreclo"se  the  mort- 
gage or  sell  the  securities,  in  accordance  with  the  terms  and 
conditions  of  the  deed  of  trust,  for  the  benefit  of  the  bond- 
holders; unless  the  corporation  can  successfully  float  another 
issue  of  bonds  for  the  purpose  of  retiring  these  first  or  under- 
lying bonds. 

Issuing  Bonds. 

318.  The  statutory  provisions  governing  the  issue  of 
bonds  must  be  strictly  complied  with  in  every  instance.  Some 
states  like  New  York  and  California  require  the  consent  of 
two-thirds  of  the  stockholders  in  interest  to  legalize  a  bond 
issue;  others  like  New  Jersey  vest  that  power  in  the  Board  of 
Directors. 

319.  Assuming  that  a  corporation  is  in  need  of  funds  to 
develop  its  properties,  extend  its  business,  or  discharge  its 
unfunded  debts,  and  for  this  purpose  it  desires  to  issue  bonds, 
what  is  the  procedure?  First,  comply  with  the  statutory  pro- 
visions as  to  the  proper  assent  of  stockholders  or  directors; 
next,  pass  resolutions  of  the  stockholders  or  directors  author- 
izing the  issue  of  bonds  and  defining  the  amount,  denomina- 
tion, classification,  interest  rate,  and  term  of  the'  bonds;  also 
the  security  which  the  corporation  is  to  give  to  guarantee 
their  payment,  the  name  of  the  trustees  to  whom  the  security 
is  to  be  delivered,  or  executed,  etc. ;  then  execute  a  "Deed  of 
Trust"  and  have  the  bonds  prepared.  For  forms  of  "Consent 
to  Mortgage,"  "Certificate  of  Consent,"  "Resolution  Author- 
izing Bond  Issue,"  "Deed  of  Trust,"  etc.,  see  "Conyngton  on 
Corporate  Management,"  page  319. 

Bond  and  Bond  Premium  Accounts. 

320.  No  entry  is  made  on  the  financial  books  of  the  cor- 
poration until  some  of  the  bonds  are  sold.  They  are  sold  only 
for  cash,  and  if  they  are  a  particularly  good  speculation  and 


AND   CORPORATION   LAW  135 

bear  a  good  rate  of  interest  they  may  be  sold  at  a  premium.. 
In  this  case  two  accounts  are  opened,  a  "Bonds  Payable  Ac- 
count" and  a  "Bond  Premium  Account";  the  former  is  cred- 
ited with  the  amount  of  the  bonds  and  the  latter  with  the 
amount  of  the  premium.  The  "Bonds  Payable  Account"  may 
be  treated  exactly  as  the  "Bills  Payable  Account"  is  treated 
in  ordinary  commercial  accounting.  If  there  be  more  than 
one  bond  issue  an  account  should  be  opened  for  each  issue, 
under  properly  designated  headings,  such  as  "First  Mort- 
gage Bond  Account,"  "Equipment  Mortgage  Bond  Account." 
If  the  bonds  are  sold  at  a  discount  a  "Bond  Discount  Ac- 
count" should  be  opened  and  charged  with  the  discount.  If 
some  of  the  bonds  are  sold  at  a  premium  and  some  at  a  dis- 
count these  two  accounts  may  be  consolidated  under  one 
heading,  "Bond  Premium  and  Discount."  In  every  case  the 
Bond  Accounts  must  be  credited  with  the  par  of  the  bonds 
as  that  is  their  redemption  value.  As  to  the  propriety  and 
utility  of  opening  Premium  and  Discount  Accounts,  it  is  far 
better  than  crediting  or  debiting  Profit  and  Loss  with  pre- 
mium and  discount,  for  the  reason  that  these  items  do  not 
belong  to  the  revenue  of  the'  company,  but  have  to  do  with 
the  capital  as  explained  in  paragraph  308. 

321.  As  to  the  disposition  of  Premium  Account:  It  is  a 
capital  revenue  and  should  be  carried  to  the  "Surplus  Ac- 
count" or  form  the  nucleus  for  a  "Sinking  Fund"  for  the  ex- 
tinction of  the  bonded  indebtedness.  The  entries  to  start  a 
Sinking  Fund  (supposing  the  premium  received  was  $1000) 
would  be  as  follows : 

Sinking  Fund,  Dr.  $1000 

To  Cash  $1000 

(This  entry  can  be  made  in  Cash  Book.) 

Premium  Account,  Dr.  $1000 

To  Sinking  Fund  Account  $1000 

322.  Note  the  distinction  and  the  difference  between 
"Sinking  Fund"  and  ''Sinking  Fund  Account."  One  is  a  debit 
representing  a  cash  asset,  the  other  is  a  credit  representing  a 
capital  liability,  which  is'  offset  and  counterbalanced  by  this 
corresponding  cash  asset.  These  entries  reduce  the  cash  bal- 
ance, establish  the  Sinking  Fund  and  wipe  out  the  Premium 
Account.  As  to  the  disposition  of  the  Discount  Account : 
This  is  a  capital  expense — an  expense  incurred  in  raising  new 
capital — and  may  be  charged  against  Surplus'  for  the  same 
reason  that  Premium  is  credited  to  Surplus ;  there  is  this  dif- 


136  CORPORATION    ACCOUNTING 

ference,  however,  and  this  justification  for  charging  it  against 
"Revenue  Expense" ;  the  funds  raised  by  the  sale  of  the  bonds 
are  necessary  to  carry  on  the  business  or  to  place  it  in  a  po- 
sition to  increase  its  revenues,  hence  the  expense  involved  in 
increasing  the  revenue  earning  capacity  of  the  business  may 
be  charged,  with  propriety,  against  the  revenue  earned;  but, 
inasmuch  as  this  expenditure  is  not  for  any  one  year  or  fiscal 
period,  it  should  be  written  off  against  the  earnings  of  a  num- 
ber of  years,  and  the  residue  considered  as  an  investment  for 
the  benefit  of  the  future.  If  the  bonds  were  issued  for  con- 
struction purposes,  or  for  permanent  improvements,  some  ac- 
countants would  charge  this  discount  to  Construction  Account 
or  Plant  Account  as  a  necessary  part  of  the  cost  of  construc- 
tion or  plant.  -At  first  glance  this  seems  reasonable  and  pro- 
per, but  as  a  matter  of  fact  it  is  not  a  part  of  the  cost  but  only 
incident  thereto.  It  is,  of  course,  the  simplest  way  of  dis- 
posing of  the  discount,  but  not  the  best.  Book  values  should 
be  as  nearly  actual  values  as  possible,  and  the  actual  cost  or 
value  is  the  amount  at  which  it  could  be  duplicated  with  am- 
ple funds  to  finance  it.  The  full  earning  capacity  of  any  busi- 
ness is  the  amount  it  is  capable  of  earning  with  sufficient  cap- 
ital. For  this  reason  the  expense  of  acquiring  sufficient  cap- 
ital to  carry  on  its  operations  should  be  kept  out  of  Profit  & 
Loss  Account,  in  order  that  the  Profit  &  Loss'  Account  may 
show  the  full  earning  capacity  of  the  business.  It  is  very 
important  to  the  corporation  to  know  this,  and  to  show  this, 
if  it  ever  wants  to  interest  new  capital  or  consolidate  with 
another  corporation. 

Selling  the  Bonds. 

323.  Usually  the  Trust  Company  holding  the  ''Trust 
Deed"  acts  as  Registrar  and  undertakes  the  sale  of  the  bonds. 
Sometimes  one  of  the  great  Underwriting  Companies  under- 
writes the  entire  bond  issue,  that  is,  for  a  certain  percentage 
of  the  face  value  of  the  bonds,  or  other  consideration,  they 
undertake  the  sale  of  the  entire  issue, — they  assume  all  the 
risk  of  placing  the  bonds,  agreeing  to  purchase  at  a  certain 
minimum  price  all  that  the  public  will  not  take.  Bonds  so 
underwritten  are  sold,  as  far  as  the  corporation  is  concerned, 
and  this  commission  is  treated  as  discount  would  be  treated; 
but  in  many  cases  there  is  no  such  commission  to  be  con- 
sidered, the  rate  of  interest  being  so  high  and  the  securities  so 
-satisfactory  that  the  bonds  easily  sell  at  a  premium,  in  which 


AND   CORPORATION    LAW  137 

case  the  underwriters  take  the  whole  issue  at  par,  or  even 
above  par,  and  derive  their  profit  out  of  the  excess  premium 
obtained. 

First  Mortgage  Bonds. 

324.  Bonds  secured  by  a  first  mortgage  on  a  company's 
property  take  their  name  from  the  mortgage  and  are  called 
^'First  Mortgage  Bonds."  They  are  a  first  lien  on  a  com- 
pany's property,  excepting  Receivers'  Certificates,  as  hereafter 
explained.  Second  or  subsequent  mortgages  are  subject  to 
the  satisfaction  of  the  first;  and  others  in  the  order  of  their 
number;  hence,  first  mortgage  bonds  are  the  best  security, 
and  the  bond  holder  is  usually  in  a  better  position  than  the 
stockholder,  for  the  bond  holder  is  bound  to  receive  his  inter- 
est, whereas  the  holder  of  ordinary  stock,  or  even  preferred 
stock,  may  or  may  not  receive  dividends.  Of  course  if  a  com- 
pany is  in  a  prosperous  condition  the  stockholder  may  receive 
more  in  dividends  than  the  bond  holder  does  in  interest. 

Coupon  Bonds. 

325.  Bonds  with  interest  coupons  attached  to  them  and 
payable  every  three,  six,  or  twelve  months  are  called  Coupon 
Bonds.  The  number  of  coupons  depends  upon  the  number  of 
years  the  bonds  are  to  run  and  the  number  of  interest  periods. 
When  a  coupon  falls  due  it  should  be  detached  and  presented 
for  payment,  as  it  does  not  bear  interest  after  due  date.  The 
coupons  are  preserved  by  the  company  as  vouchers'  for  the 
interest  paid.  A  "Bond  Interest  Account"  and  sometimes  a 
"Bond  Interest  Due  Account"  is  opened  for  these  coupons; 
(vide  paragraph  327,  et  seq.)  this  serves  the  purpose  of  show- 
ing the  total  interest  accrued,  and  the  amount  paid,  on  the 
bonds.  Such  companies'  as  carry  a  Bond  Interest  Account 
should  always  make  an  entry  like  this  in  their  annual  state- 
ment of  disbursements :  "Interest  Paid  on  Bonds."  This  is  a 
good  practice,  as  many  stockholders  want  to  know  in  detail 
'Vhere  all  the  money  goes."  Besides,  this  interest  is  a  part 
of  the  penalty  a  company  pays  for  want  of  sufficient  capital 
of  *its  own,  and  should  not  be  deducted  from  the  earnings  but 
from  the  profits  of  the  company.  We  must  always  differ- 
entiate between  earnings  and  profits.  These  bonds  and  cou- 
pons are  payable  to  bearer  and  title  passes'  by  delivery;  for 
this  reason  they  are  more  convenient  for  speculative  purposes 
or  short  time  investments.  It  frequently  happens  that  com- 
panies provide  for  the  conversion  of  Coupon  Bonds  into  Reg- 


138  CORPORATION   ACCOUNTING 

istered  Bonds — United  States  Coupon  Bonds  may  be  so  con- 
verted. 

Registered  Bonds. 

326.  These  bonds  differ  in  many  respects  from  Coupon 
Bonds.  They  are  called  Registered  Bonds  from  the  fact  that 
the  number,  denomination,  payee  and  address,  etc.,  are  regis- 
tered in  a  ''Bond  Register"  kept  by  the  corporation  issuing 
them.  The  name  of  the  payee  or  owner  is  written  on  the  face 
of  every  bond  and  they  can  only  be  transferred  by  assignment 
duly  acknowledged  and  witnessed  and  by  re-registry.  The 
Treasury  Department  of  the  United  States  government  keeps 
a  ledger  account  with  every  such  bondholder,  particularizing 
every  bond  held  by  each.  When  interest  falls  due  on  these 
bonds  checks  are  mailed  to  the  owners  or  holders  as  the  names 
and  addresses  appear  on  the  Register  or  Ledger  before  the 
books  are  closed  against  transfers.  They  possess  these  advan- 
tages over  coupon  bonds :  The  owner  is  more  secure  in  their 
possession  since  the  title  does'  not  pass  to  the  mere  holder, 
he  does  not  have  to  look  out  for  the  interest  periods,  nor  dread 
the  loss  of  coupons. 

Accounting  for  Bond  Interest. 

327.  The  matter  of  accounting  for  registered  bond  interest 
is  very  simple.  The  interest  is  supposed  to  be  paid  at  matur- 
ity. The  checks  are  drawn,  charged  up  to  Bond  Interest,  re- 
corded on  the  Register  and  mailed  to  the  bondholders.  A  spe- 
cial form  of  check  is  used,  something  like  the  following: 

328. 


4-» 

m 

(U 

u 

^^ 

'dO 

a 

0 

W 

First  Mortgage  6%  Gold  'Bonds,  maturing- 190.  .     %..  .. 

Date 

Pay  to  the  order  of 

Dollars 

quarterly  interest  on  Registered  Bond  No for  quarter 

ending 

No  Signed 


329.  These  checks  are  preserved  as  vouchers  for  the  pay- 
ment of  the  interest,  and  their  return  should  be  looked  for  and 
examined  into  by  the  Auditor,  to  see  that  the  endorsement 
compares  with  the  signature  on  file. 


AND   CORPORATION   LAW  139 

330.  Accounting  for  coupons  is  not  so  simple.  As  the  in- 
terest is  a  liability  of  the  company,  when  it  falls  due  a  charge 
should  be  made  against  "Bond  Interest"  account  and  "Bond 
Interest  Due"  account  credited  with  the  amount  thus : 

Bond  Interest     Dr. 

To  Bond  Interest  Payable 

for  quarterly  interest  now  due  and  payable,  etc. 

331.  This  Bond  Interest  is  the  amount  of  the  expenditure 
as  distinguished  from  the  amount  of  the  disbursement.  It  is 
to  be  paid,  and  is  a  charge  against  the  profits  of  the  period. 
The  "Bond  Interest  Payable"  is  a  liability  that  has  to  be  met 
as  the  matured  coupons  are  presented  for  payment.  When 
presented  they  are  paid  and  charged  to  ''Bond  Interest  Pay- 
able" and  the  balance  of  this  account  is  the  existing  liability 
on  accrued  interest. 

332.  The  coupons  should  be  cancelled  in  such  a  way  that 
they  can  not  be  run  in  a  second  time ;  and  the  date  of  payment 
should  be  stamped  on  them,  or  cut  into  them ;  this  will  facili- 
tate the  work  of  the  auditor  in  checking  disbursements  by 
date,  and  prevent  what  is  known  as  ''lapping."  A  count  of  the 
coupons  in,  obviously  shows  the  number  out;  and  these  should 
equal  the  balance  of  the  "Interest  Due  Account."  There  are 
many  ingenious  ways  of  filing  these  coupons,  perhaps  the  very 
best  is  a  scrap  book  arranged  a  page  to  a  bond,  the  pages  being 
divided  into  squares  equaling  in  size  and  number  the  coupons 
of  each  bond,  and  then  superimposing  the  coupons  cashed  in 
these  squares  thus : 

333- 


Coupon 
No.  1 

Coupon 
No.  2 

Coupon 
No.  3 

Coupon 
No.  4 

with  proper  heading. 

Equipment  Bonds. 

334.  These  bonds  are  peculiar  to  railroad  companies. 
They  are  secured  by  a  mortgage  on  the  rolling  stock  or  equip- 
ment of  the  company,  hence  the  name. 

Car  Trusts. 

335.  Car  Trust  Certificates  relate  also,  as  their  name  im- 
plies, to  railroad  financeering.  This  is  a  form  of  bond  issued 
by  some  railroad  companies'  in  payment  for  equipment,  and 


140  CORPORATION    ACCOUNTING 

they  constitute  a  first  lien  on  locomotives,  freight  and  passen- 
ger cars.  They  are  given  to  secure  say  75  or  80  per  cent  of 
the  cost  and  are  issued  in  serial  form  covering  a  period  of  ten 
years,  one  series  falling  due  each  year.  They  admit  of  a  rail- 
road company  paying  for  its  equipment  on  the  instalment  plan. 
The  title  to  the  equipment  remains  in  the  certificate  holders' 
until  the  last  series  is  paid,  so  that  their  security  increases 
each  year  in  the  same  ratio  as  the  company's  equity.  This, 
and  the  usually  high  rate  of  interest  they  bear,  makes  them  a 
very  valuable  security  and  is  the  chief  reason  why  they  are 
so  little  known.  They  are  held  by  a  few  of  the  big  investors 
and  never,  or  at  least  rarely,  offered  on  the  market.  Usually 
they  have  coupons  attached,  and  while  they  are  in  the  form 
of  a  bond  they  are  called  "Equipment  Notes"  or  "Car  Trusts." 

Collateral  Trust  Bonds. 

336.  These  bonds  also  belong  to  the  railroad  class.  Some 
of  the  great  railway  companies'  like  the  Southern  Pacific  Com- 
pany own  large  blocks  of  the  stocks  and  bonds  of  smaller  sub- 
sidiary companies  or  proprietary  lines.  These  securities  are 
used  as  collateral  by  the  proprietary  company  and  form  the 
basis  of  security  of  collateral  trust  bonds,  a  "Collateral  Trust 
Agreement"  being  executed  and  delivered  with  these  securi- 
ties to  a  Trustee  to  secure  the  payment  of  the  bonds.  The 
securities  given  are  usually  in  excess  of  the  bond  issue,  and  the 
income  therefrom  in  dividends'  and  interest  is  applied  by  the 
Trustee — first  to  pay  the  interest  on  the  bonds,  and  the  balance 
goes  toward  making  up  a  Sinking  Fund  for  their  redemption. 

I  Land  Grant  Bonds. 

337.  When  the  Central  Pacific  Railroad  Company  built 
the  first  line  of  railroad  to  and  through  the  West  it  received 
large  grants  of  land  from  the  government.  These  lands  formed 
the  basis  of  security  for  bonds  issued  against  them,  hence 
''Land  Grant  Bonds."  This  was'  first  class  security  as  the  land 
constantly  increased  in  value,  and  as  it  was  sold  certain  of 
the  bonds  were  retired — this  is  a  typical  illustration  of  this 
class  of  bonds  in  general. 

Prior  Lien  Bonds. 

338.  These  are  bonds  having  a  prior  lien  on  all  the  assets 
of  a  company.  To  this  class  belong  ''Receivers  Certificates." 
When  a  railroad  company  passes  into  the  hands  of  a  Receiver, 
it  is  practically  in  the  hands  of  the  Court,  and  the  Court  may 


AND   CORPORATION   LAW  141 

authorize  the  issue  of  Receivers  Certificates  to  meet  emerg- 
encies, or  for  maintenance  purposes.  In  other  words,  the 
Court  mxakes  use  of  extraordinary  means  to  protect  the  cred- 
itors and  prevent  unnecessary  loss  or  waste  of  assets.  As 
funds  are  urgent  a  sure  and  speedy  means  of  raising  them  is 
provided  by  the  sale  of  Receivers  Certificates.  These  certifi- 
cates have  a  priority  over  First  Mortgages  Bonds',  and  all 
other  claims,  hence  their  purpose  is  easy  of  accomplishment. 
When  the  road  is  in  the  hands  of  a  Receiver  the  other  bond- 
holders are  sometimes  forced  to  make  a  settlement  and  this 
leads  to  the  issue  of  "Adjustment  Bonds'." 

Atchison  Adjustment  Bond. 

339.  These  bonds  were  authorized  at  the  time  of  reorgan- 
ization of  the  Atchison  Company  in  1895,  when  the  old  First 
Mortgage  Bonds  were  retired  and  the  new  General  Mortgage 
Adjustment  Bonds  were  authorized  and  issued  under  the  plan 
of  reorganization,  in  exchange  for  the  old  First  Mortgage 
Bonds.  They  are  in  one  sense  a  Second  Mortgage  Bond 
being  subject  to  the  lien  of  the  General  Mortgage  Bond  of  the 
Atchison  Company,  and  in  another  particular  they  resemble 
an  Income  Bond  inasmuch  as  they  carry  no  fixed  rate  of  in- 
terest. Interest  on  these  bonds  is  limited  to  4%  but  the  pay- 
ment of  interest  is  dependent  on  the  earnings  of  the  com- 
pany. Owing  to  the  present  financial  condition  of  this  com- 
pany and  the  market  value  of  its  stocks,  the  investing  public 
regard  these  as'  a  desirable  bond. 

Consolidated  Mortgage. 

340.  Sometimes  companies  get  top-heavy  in  their  bond 
issues,  business  becomes  more  or  less  stagnant,  or  trade  is 
intermittent,  and  they  are  not  able  to  pay  all  the  fixed  charges 
out  of  the  income,  so  that  some  kind  of  reorganization  is 
necessary.  In  such  cases  it  frequently  happens  that  the  va- 
rious bond  issues  are  consolidated  into  one,  bearing  a  lower 
rate  of  interest.  The  bondholders  accept  these  in  exchange 
on  a  certain  agreed  basis,  because  the  company  is  crippled  and 
it  is  the  best  way  out  of  a  bad  fix.  Sometimes  consolidated 
bonds  are  issued  with  a  view  to  raising  new  capital  or  to  unify 
or  retire  the  various  outstanding  issues,  bearing  various  rates 
of  interest  and  maturing  at  different  times.  Other  bonds  is- 
sued by  railroad  companies  are  "Division  Bonds"  and  "Exten- 
sion Bonds"  which,  as  their  names  imply,  cover  certain  di- 
visions of  a  road,  or  are  used  to  fund  certain  extensions. 


142  CORPORATION   ACCOUNTING 

Refunding  Bonds. 

341.  It  not  infrequently  happens  that  Sinking  Funds  are 
wholly  inadequate  for  the  redemption  of  maturing  bonds.  In 
such  an  exigency  a  new  issue  of  bonds  is  financed  to  fund  the 
old  ones.  The  consolidated  bonds  and  adjustment  bonds  pre- 
viously defined  are  classes  of  Refunding  Bonds. 

Income  Bonds. 

342.  Income  bonds  are  somewhat  in  the  nature  of  a  cross 
between  preferred  stock  and  debenture  bonds,  possessing 
some  of  the  characteristics  of  both.  They  are  not  issued 
against  any  special  tangible  security  like  other  bonds,  but  de- 
pend, both  as  to  principal  and  interest,  on  the  income  of  the 
company.  The  interest  is  payable  only  out  of  income — after 
all  other  fixed  charges  have  been  paid.  In  this  they  resemble 
preferred  stock.  In  the  matter  of  security  they  resemble  de- 
bentures. Like  preferred  stock  they  may  be  cumulative  or 
non-cumulative.  In  the  latter  case  the  coupons  are  worthless 
for  any  year  in  which  the  company  fails  to  earn  sufficient  net 
revenue  to  meet  them. 

Debenture  Bonds. 

343.  The  term  Debenture  is  derived  from  the  latin  word 
debentur,  meaning  "they  are  due"  and  logically  speaking  any 
written  acknowledgement  of  a  debt  is  a  debenture.  In  rail- 
road finance  a  Debenture  Bond  is  an  old  form  of  bond  given 
without  the  formality  of  a  mortgage  or  collateral  security. 
They  are  written  evidences  of  the  company's  indebtedness  to 
the  holders,  signed  and  executed  by  the  officers  of  the  com- 
pany. They  are  promises  to  pay  without  any  special  pledge 
of  the  corporation  property  to  secure  them  and  in  this  sense 
they  are  unsecured  promissory  notes.  In  the  matter  of  secur- 
ity they  stand  between  the  stock  and  the  secured  bonded  in- 
debtedness. 

344.  Some  financial  corporations  issue  what  they  call  "de- 
bentures" based  on  a  collateral  trust  agreement  and  secured 
by  the  deposit  of  bonds  and  mortgages  which  they  own. 

345.  In  England  the  term  "debenture"  has  a  more  ex- 
tended meaning.  It  is  applied  to  a  Deed  of  Mortgage  given 
by  railway  companies,  to  municipal  bonds  and  other  securities 
for  money  borrowed.  The  English  classification  is  Mortgage, 
Trust,  Simple,  Registered,  Unregistered,  Redeemable  and 
Irredeemable  Debentures. 


AND   CORPOEATION"   LAW  143 

Deferred  Bonds. 

346.  These  are  somewhat  in  the  nature  of  an  indefinite 
or  perpetual  loan,  which  may  or  may  not  be  redeemed  at  their 
face  value.  Interest  on  these  bonds  is  sometimes  contingent 
on  the  happening  of  some  event,  and  sometimes  they  receive 
a  graduating  rate  of  interest  up  to  a  certain  point,  at  which 
time  they  are  converted  into  "Active  Bonds." 

Bottomry  Bonds. 

347.  This  is  a  form  of  bond  peculiar  to  shipping.  When 
the  owner  or  master  of  a  ship  pledges  the  keel  or  bottom  of 
his  ship,  or  in  other  words  mortgages  his  ship  to  secure  some 
obligation,  the  instrument  of  conveyance  is  called  a  Bottomry 
Bond.  It  is  a  risky  sort  of  bond ;  for,  in  case  the  vessel  is  lost 
the  bondholder  loses  all  that  he  had  to  secure  him. 

Respondentia  Bond. 

348.  This  is  a  bond  based  on  the  cargo  of  a  vessel,  as  dis- 
tinguished from  a  bond  based  on  the  vessel  itself. 

Convertible  Bonds. 

349.  Convertible  bonds  and  convertible  stocks  are  fre- 
quently issued  by  corporations.  I  will  explain  the  subtle  pur- 
poses of  these  conversions.  A  corporation  having  an  issue 
of  7%  preferred  stock  provides  for  the  conversion  of  this  into, 
^ay,  5%  bonds.  Now,  on  the  face  of  this  it  would  appear  fool- 
ish on  the  part  of  the  holders  of  7%  stock  to  exchange  it  for 
5%  bonds;  but  there  are  two  important  and  sometimes  vital 
considerations.  As  previously  explained,  all  dividends  are 
contingent  on  being  earned ;  while  interest  on  bonds  is  a  fixed 
charge  and  must  be  paid;  it  therefore  resolves  itself  into  a 
change  from  expectancy  to  certainty ;  but  there  is  a  more  pow- 
erful reason,  especially  in  some  of  those  high  finance  corpora- 
tions. The  student  must  know  by  this  time  that  the  stockholders 
of  a  corporation  are  not  its  creditors,  but  the  bondholders  are, 
and  although  these  bonds  are  in  the  debenture  class,  they 
come  in  ahead  of  the  stockholders,  and  their  equitable  rights 
are  adjudicated  before  the  stockholders  get  a  show — in  case 
the  balloon  collapses.  It  is  also  unfortunately  true  that  some- 
times the  highly  watered  preferred  stock  of  a  corporation  is 
deposited  in  a  supposedly  reputable  Trust  Company  as  the 
sole  basis'  of  security  for  an  issue  of  bonds,  and  the  magic 


144  CORPORATION    ACCOUN'liNG 

name  of  bonds  is  the  medium  through  which  the  pubhc,  on 
this  slender  security,  furnishes  the  money  to  finance  the  sick 
corporation. 

350.  As  to  converting  bonds  into  common  stock,  the  pur- 
pose at  first  sight  does  not  seem  very  clear.  This  is  done  for 
the  benefit  of  the  corporatioi^,  and  to  strengthen  its  credit.  In- 
asmuch as  the  bondholders  are  creditors  and  the  stockholders 
are  not,  the  conversion  of  bonds  into  stock  is  a  reduction  of 
the  company's  direct  or  trade  liabilities;  therefore  the  com- 
pany's credit  is  strengthened  to  the  amount  of  the  bonds  so 
converted. 

Gold  Bonds. 

351.  Gold  bonds,  as  their  name  implies,  are  bonds,  the 
principal  and  interest  of  which  are  payable  in  gold  coin  of  equal 
weight  and  fineness  of  the  present  coinage,  or  its  equivalent. 

Government  Bonds. 

352.  United  States  Government  Bonds  are  bonds  issued 
by  ithe  government  under  authority  of  Congress  for  the  pur- 
pose of  replenishing  a  depleted  treasury,  the  redemption  of 
Legal  Tender  Notes,  the  carrying  on  of  war,  the  prosecution 
of  some  public  work  and  the  like.  As  previously  stated  they 
are  issued  on  the  credit  of  the  government,  and  as  the  credit 
of  our  government  is  exceedingly  good,  there  is  not  merely 
a  ready  sale  for  them,  but,  they  almost  invariably  sell  at  a  pre- 
mium. The  authorizing  Acts  invariably  provide  that  the 
bonds  shall  be  sold  at  not  less  than  par  in  coin.  The  present 
classification  of  U.  S.  Bonds  is  as  follows : 

2%  Consols  of 1930 

3%  Bonds  of 1908-18 

4%  Bonds  of 1907 

4%  Bonds  of 1925 

353.  The  2%  Consols  were  created  by  an  act  of  March 
14,  1900,  and  the  Secretary  of  the  Treasury  was  authorized 
to  exchange  them  at  par  for  the  5%  loan  of  1904,  the  4% 
funded  loan  of  1907  and  the  3%  loan  of  1908-1918.  This  is  why 
they  are  called  "Consols,"  the  term  being  an  abbreviation  of 
"Consolidated,"  and  the  purpose  being  to  consolidate  these 
issues  into  one. 


AND    CORPORATION   LAW  145 

State  Bonds. 

354.  State  bonds  are  bonds  issued  by  the  state  for  public 
improvements,  such  as  dredging  rivers,  improving  harbors 
and  erecting  pubHc  buildings. 

Municipal  Bonds. 

355.  Municipal  bonds  are  bonds  issued  by  cities  for  the 
acquisition  of  public  utilities,  such  as'  gas  or  water  works,  or 
the  making  of  public  improvements,  such  as  street  paving  or 
sewering;  these  are  usually  considered  good  securities.  Pur- 
chasers, however,  are  very  careful  in  investigating  the  issue, 
as  the  least  irregularity  in  the  holding  of  the  Bond  Election, 
or  the  advertisement  thereof,  will  invalidate  the  issue. 

Values  of  Stocks  and  Bonds. 

356.  Stocks  and  bonds  have  three  distinct  values :  First — 
Par  value,  or  nominal  value,  which  is  the  face  value,  or  amount 
expressed  on  the  face  of  the  certificate  or  bond,  which  may 
or  may  not  be  its  actual  value.  Second — Market  value,  which 
is  the  value  the  stock  has  in  the  open  market,  or  when  offered 
for  sale  on  exchange.  This  value  is  not  fixed  or  staple  and 
may  vary  from  day  to  day,  according  to  present  conditions, 
future  prospects,  or,  according  to  supply  and  demand  as  in- 
fluenced by  the  action  of  the  "bears"  and  the  "bulls."  Third — 
Intrinsic  value,  which  depends  on  the  assets  or  securities  of 
the  company  at  the  time  of  liquidation,  and  is  the  actual 
amount  which  the  stockholders  or  bondholders  receive  when 
the  affairs  of  the  company  are  wound  up.  Ordinarily  speak- 
ing, the  market  value  is  the  mean  between  the  "asked"  and 
"bid"  price.  The  usual  par  value  of  railroad  and  industrial 
stock  is  $100  and  the  usual  denomination  of  bonds  is  $1000 
although  there  are  some  $500  bonds,  or  half  bonds.  There  are 
four  elements  that  enter  into  the  value  of  a  bond,  viz :  the  suf- 
ficiency of  the  security,  the  rate,  the  interest  periods  and  the 
time  the  bond  has  to  run. 

357.  Plere  is  a  little  problem  that  will  serve  to  illustrate 
how  the  last  three  factors  enter  into  the  value  of  a  bond,  as- 
suming the  first  to  be  satisfactory : 

358.  "A"  has  an  S%  bond  (interest  payable  half-yearly) 
with  5  years  to  run.  He  wishes  to  sell  this  bond  and  I  am 
willing  to  purchase  it  at  a  price  that  will  yield  me  6%  per  an- 
num (payable  half-yearly).  How  much  will  I  have  to  pay  for 
this  bond? 


146  CORPORATION    ACCOUNTING 

360.     We  observe  that  this  bond  has  ten  $4  coupons  at- 
tached to  it. 


The  1st  coupon  compounded  for  9  terms  at  3% 
The  2d  coupon  compounded  for  8  terms  at  3% 
The  3d  coupon  compounded  for  7  terms  at  3% 
The  4th  coupon  compounded  for  6  terms  at  3% 
The  5th  coupon  compounded  for  5  terms  at  3% 
The  6th  coupon  compounded  for  4  terms  at  3% 
The  7th  coupon  compounded  for  3  terms  at  3% 
The  8th  coupon  compounded  for  2  terms  at  3% 
The  9th  coupon  compounded  for  i  term  at  3% 
The  loth  coupon  compounded  for  o  term  at  3% 


5.219092 
5.067080 
4.919492 
4.776208 
4.637096 
4.502032 
4.370908 
4.243600 
4.120000 
4.000000 


Total  of  coupons  compounded  to  time  of  redemption  45.855508 
Face  value  of  bond  at  time  of  redemption 100.000000 


Total  of  coupons,  int.  on  coupons  and  face  of  bond 

to  time  of  redemption    $145.855508 

361.  What  we  receive  on  the  bond  and  coupons  is  $140. 
What  w^e  want  to  make  is  this  and  the  interest  at  6%  yearly 
(compounded  half  yearly)  or  3%  half  yearly;  and  this  amounts 
to  $5.885508.  The  payment  of  the  loth  coupon  synchronizes 
with  the  payment  of  the  bond  itself. 

362.  Now  the  problem  arises :  What  sum  invested  at  6% 
per  annum  compounded  half  yearly  will  amount  to  $145,855 
at  the  end  of  5  years?  One  dollar  invested  on  these  terms  will 
amount  in  5  years  to  $1.343916;  dividing  this  into  the  above 
total  145.855508  we  obtain  the  quotient  108.53;  2.nd  this'  is  the 
value  of  the  bond  or  the  price  I  will  have  to  pay  to  realize 
6%  interest  on  my  investment  (compounded  half  yearly).  In 
other  words,  $108.53  is  the  "present  worth  to  yield  an  income 
of  6%  compounded  semi-annually,"  a  phrase  used  by  bond 
brokers  in  quoting  their  offerings. 

363.  But  the  foregoing  method  while  elucidative  of  the 
principles  of  calculating  bond  values  is  too  long  for  frequent 
use,  so  we  avail  ourselves  of  a  shorter  method. 

364.  The  10  coupons  with  accruing  interest  at  3%  form 
a  geometrical  series.  Here  we  have  three  known  quantities 
and  the  problem  is  to  find  the  fourth. 

A  the  first  quantity  is  the  coupon $4.00 

R  the  second  quantity  is  the  ratio  (to  the  buyer) . .  .      1.03 

N  the  third  quantity  is  the  number  of  terms 10 

S  the  fourth  quantity  is  the  sum  of  the  series ;  and  we  find 
this  by  the  following  formula: 


AND   CORPORATION  LAW  147 

A  Rn  _  A 

=S;  or  to  express   it  in  words  and  figures': 

R     —  I 

We  multiply  the  first  term  (which  is  4)  by  the  ratio  1.03 
raised  to  the  power  indicated  by  the  number  of  terms  (which 
is  10),  then  from  this  product  we  subtract  the  first  term,  the 
remainder  we  divide  by  the  ratio  1.03-1  or  .03. 

365.  I  will  endeavor  to  explain  the  formula  and  give  the 
reason  for  the  rule.  By  raising  1.03  to  its  tenth  power  we  ob- 
tain the  value  of  $1  at  compound  interest  for  the  10  periods; 
multiplying  this  by  4  we  arrive  at  the  value  of  one  coupon  for 
the  10  periods ;  and  by  deducting  the  coupon  the  interest 
stands  by  itself;  or  to  put  it  in  another  way:  By  raising  the 
ratio  to  its  tenth  power  we  get  the  value  or  amount  of  $1  at 
compound  interest  for  ten  periods,  deducting  the  principal  $1 
we  have  the  interest  on  a  series  of  $1  investments  which  is 
.343916.  Multiplying  this  by  4  the  amount  of  the  coupons  we 
get  the  total  interest  on  the  series  of  coupons,  which  is 
.343916  X  4=1.375664.  Now,  this  interest  is  3%  of  the  prin- 
cipal, or  of  the  sum  of  the  series ;  and  as  there  are  33  1-3  times 
3  in  100  it  follows  that  we  obtain  the  sum  by  multiplying  the 
interest  by  33  1-3,  and  multiplying  by  33  1-3  is  equivalent  to 
dividing  by  .03  thus :  1.375664  X  33  i-3=$45.855+.  Of  course 
the  physical  labor  involved  in  work  of  this  kind  can  be  reduced 
to  a  minimum  only  by  the  use  of  logarithms. 

Funds. 

366.  It  is  not  my  purpose  to  enter  into  an  academic  or 
■philosophic  discussion  of  the  nature  and  uses  of  funds.  Prof. 
Frederick  A.  Cleveland,  Ph.  D.,  in  his  admirable  work,  ''Funds 
and  their  Uses,"  has  completely  covered  this-  field ;  it  is  per- 
tinent, however,  to  make  a  few  general  remarks  on  the  subject 
before  proceeding  to  define  the  various  funds  created  by  cor- 
porations both  for  specific  and  unspecified  purposes. 

367.  A  fund  in  the  sense  in  which  it  is  used  here  is  an  ac- 
cumulatiion  of  money  or  quick  assets  easily  convertible  into 
money.  To  "fund"  any  enterprise  is  to  provide  a  fund  or 
revenue  to  carry  on  the  enterprise.  To  "fund"  a  debt  or  a 
loan  is  to  provide  the  funds  necessary  to  liquidate  the  debt  or 
repay  the  loan.  These  funds  may  be  provided  by  the  sale  of 
solvent  credits;  that  is,  credits  secured  by  lien  on  the  assets 
of  a  company,  such  as  real  and  chattel  mortgages. 


148  COEPORATION    ACCOUNTING 

Funded  Debt. 

368.  Funded  Debt  means  the  amount  of  debts  of  a  com- 
pany secured  by  bonds,  which  in  turn  are  secured  by  mort- 
gage, or  by  Treasury  Securities  in  excess  of  the  amount  of  the 
debt.  To  meet  this  maturing  obHgation  when  due  a  fund  is 
created  out  of  the  revenues'  of  the  company.  The  student  will 
note  the  difference  between  a  "funded  enterprise"  and  a 
"funded  debt."  We  fund  an  enterprise  by  the  sale  or  pledge 
of  credits  in  the  shape  of  bonds  and  mortgages.  We  fund  this 
debt  or  obligation,  in  turn,  by  providing  a  fund  out  of  the 
revenues  of  the  "funded  enterprise"  to  redeem  these  pledged 
credits  at  maturity;  hence  the  name  given  to  this  class  of  debt 
to  distinguish  it  from  "floating  debt,"  which  is  the  unfixed, 
undetermined  or  unfunded  debts  of  a  company. 

Sinking  Fund. 

369.  This  is  the  name  usually  given  to  a  fund  set  aside  or 
created  out  of  the  revenues  of  a  company  into  which  we  sink 
the  funded  debts  of  a  company  at  the  time  of  their  maturity. 
This  definition  would  vary  slightly  where  the  Sinking  Fund  is 
created  for  the  purpose  of  wiping  out  premiums  on  bond  pur- 
chases ;  as  in  such  cases'  it  is  created  out  of  the  interest  on  the 
bonds,  the  balance  of  interest  going  to  Revenue  Account,  as 
explained  in  paragraph  386. 

370.  A  Sinking  Fund  to  liquidate  a  bonded  indebtedness 
is  created  in  one  of  three  ways :  We  factor  the  amount  of  the 
indebtedness  by  the  number  of  years  to  maturity,  and  place 
equal  amounts  each  year  in  the  Sinking  Fund,  crediting  the 
interest  on  the  investment  of  this  fund  to  Revenue  Account 
each  year;  or,  we  ascertain  what  sum  of  money  set  aside  and 
invested  each  year  would  with  accumulated  interest  amount 
in  the  given  number  of  years  to  the  given  amount  of  the  debt; 
or,  we  find  the  amount  which  if  paid  in  equal  instalments  each 
period  will  extinguish  both  principal  and  interest  at  the  end 
of  the  last  period — this  latter  is  called  the  instalment  or 
annunity  method.  In  such  cases  compound  interest  is  always 
calculated. 

Illustrating  First  Method. 

371.  Suppose  we  have  a  bonded  indebtedness  of  $20,000 
that  we  wish  to  wipe  out  in  10  years  from  now.  We  divide 
10  (the  number  of  years)  into  20,000  (the  amount  of  the  debt) 
and  we  get  the  quotient  2000;  therefore,  if  we  set  $2000  aside 


AND    CORPORATION   LAW 


149' 


for  lo  years  at  the  end  of  that  time  we  will  have  a  fund  suffi- 
cient to  pay  off  the  bonded  indebtedness ;  and  as  it  is  our  plain 
duty  to  have  this  fund  invested,  the  interest  from  such  an  in- 
vestment should  be  credited  to  Revenue  Account.  Now,  we 
can  readily  see  that  we  are  only  apparently  setting  aside  $2000 
a  year  out  of  the  earnings,  inasmuch  as  it  is  bringing  in  some 
revenue  in  the  shape  of  interest,  so  while  the  above  method 
may  answer  our  purposes,  and  is  the  simplest,  it  is  by  no 
means  the  best. 

Illustrating  Second  Method. 

372.  What  we  want  to  know  is'  the  exact  sum  necessary 
to  set  aside  each  year  and  keep  invested  so  that  this  yearly 
or  periodical  sum  and  its  accumulation  will  exactly  liquidate 
the  bonds  at  maturity.  In  order  to  make  this  as  simple  as 
possible  I  will  illustrate  this  method  of  creating  a  Sinking 
Fund  with  the  previous  bond  problem ;  prefacing  the  illustra- 
tion with  a  few  clarifying  remarks.  Money  set  aside  for  Sink- 
ing Fund  purposes  is,  as  we  know,  taken  out  of  the  business 
and  invested,  at  least  theoretically,  in  securities  paying  semi- 
annual dividends.  We  also  know  that  Sinking  Funds  are 
created  out  of  revenues,  hence  the  starting  of  the  Sinking 
Fund  is  not  coetaneous  with  the  bond  issue,  as  that  would  be 
starting  it  out  of  the  proceeds  of  the  bonds  instead  of  out  of 
the  earnings  of  the  proceeds,  and  would  be  somewhat  anal- 
ogous to  paying  a  dividend  out  of  capital.  The  Sinking  Fund, 
therefore,  has  its  beginning  six  months  after  the  bond  issue, 
or  when  the  first  coupons  fall  due.  It  is  then  we  begin  to  set 
aside  a  sum  which  if  improved  at  a  certain  rate  of  compound 
interest  (in  this  case  3%  semi-annually)  will  equal  the  amount 
of  the  bonds  at  their  maturity.  Now,  suppose  we  had  ascer- 
tained that  the  amount  necessary  to  produce  such  a  fund  was 
$1  every  six  months  till  the  maturity  of  the  bonds  and  that  we 
invested  the  first  dollar  six  months  after  the  bond  issue,  we 
would  then  bring  about  a  condition  illustrated  by  the  follow- 
ing diagram : 


^Z^' 

$1 

$1 

$1 

$1 

$1 

$1 

$1 

$1 

SI 

$1 

9 

8 

7 

6 

5 

4 

3 

2 

1 

0 

S 

1 

2 

3 

4 

5 

6 

7 

8 

9 

374.     "S"  represents  the  starting  point  of  the  Fund.     The 
lower  line  of  numerals  represents  the  distance  in  time  (reck- 


150  CORPORATION    ACCOUNTING 

oned  by  the  interest  periods)  each  one  is  removed  from  the 
starting  point;  the  middle  Hne  represents  the  number  of  pe- 
riods each  $1  in  the  upper  hne  is'  invested.  We  set  aside  $io 
toward  the  Fund;  the  first  dollar  earns  interest  for  9  periods 
and  the  last  one  earns  no  interest,  as  we  see  by  the  lower  line 
that  there  are  only  9  interest  periods  from  the  starting  of  the 
Fund.  While  these  periods  are  equi-different  as  to  time  they 
are  equi-rational  as  to  amounts ;  that  is  to  say,  in  value  they 
have  an  equal  ratio,  one  to  the  other,  hence  they  form  an  equi- 
rational  or  geometrical  series  with  i  as  the  first  term  and  1.03. 
as  the  ratio  as  follows : 

i.03«+i.03«+i.03^+i.03«+i.03^+i.03*+i.033+i.032+i.03-|-i 

or 
i+i.03+i.03-+i.03"+i.034+i.03s+i.036  -|-i.03^+i.03«+i.03« 

Here  we  have  a  series'  of  10  terms,  and  we  obtain  the  sum  of 
the  series  by  the  formula : 

1.0310— I 

that  is,  by  dividing  the  compound  interest  on  $1 

1.03    —I 

for  ten  terms  by  the  interest  on  $1  for  one  term;  which  is 
equivalent  to  multiplying  by  33  1-3. 

376.  But,  the  question  is  asked  why  do  we  find  the  com- 
pound interest  for  10  terms  when  the  dollar  compounds  only 
9  times?    This  I  will  try  to  explain  by  analysis. 

377.  One  dollar  at  3%  compound  interest  for  9  terms' 
amounts  to  1.304773,  subtracting  the  principal  the  interest 
amounts  to  .304773.  Now  the  interest  is  3%  of  the  principal 
of  $1  invested  9  times,  and  33  1-3  times  this  will  be  100%  on 
the  principal,  but  we  want  103%  of  the  principal,  and  to  ob- 
tain this  we  add  3%  of  the  sum  obtained  to  itself.  We  then 
have  the  sum  of  the  nine  $1  investments  and  their  accumulated 
interest,  and  to  this'  we  add  the  $1  which  does  not  earn  any 
interest.    This  gives  us  the  complete  sum  of  the  series  thus : 

.304773  X  33  1-3=10.159100  -f  3%  or  .304773=10.463873 
+  i=ii.463873=the  sum;  and  if  we  took  the  9th  power  of 
1.03  which  is  1.304773  and  multiplied  it  by  the  ratio  1.03  that 
is  raised  it  to  the  tenth  power,  and  multiplied  the  interest  so 
found  by  33  1-3  we  would  get  the  same  result,  from  which  we 
conclude  that  the  compound  interest  of  $1  at  3%  for  10  terms 
is'  equal  to  3%  of  the  sum  of  a  geometrical  series  of  10  terms 
with  1.03  as  the  ratio. 

378.  To  further  prove  this  formula  we  will  develop  it  in 
:another  and  perhaps  a  more  lucid  way.    Let  ''S"  represent  the 


AND  CORPORATION   LAW  151' 

sum  and  equal  all  the  terms  of  the  series  set  down  in  order; 
then  multiply  both  the  sum  and  every  term  by  the  ratio  1.03 
thus : 

S=l+1.03+1.03+1.03+1.03+1.03-f  1.03+1.03+1.03+1.03. 

1.03S=       1.03+1.03+1.03+1.03+1.03+1.03+1.03+1.03+1.03+1.03. 
.03S=(1.03io)— 1. 

S=:(1.03io)— 1. 
.03 

Here  we  see  that  by  multiplying  the  sum  and  all 
its  terms  by  the  ratio  we  get  1.03  of  the  sum  and 
1.03  of  all  its  terms.  We  place  1.03  of  the  sum  under  ''S"  and 
1.03  of  I  under  1.03  and  so  on.  We  then  subtract  the  upper 
line  from  the  lower  to  get  the  difference  between  the  sum  and 
1.03  of  the  sum.,  and  we  observe  that  by  the  arrangement  of 
the  products  in  the  lower  line  all  the  terms  except  the  first  and 
last  cancel  each  other.  Now  we  observe  that  the  difference 
between  **S"  and  1.03S  is  .03S;  since  SXi-03=S.03.  We  fur- 
ther observe  that  there  is  nothing  in  the  lower  line  under  the 
I  in  the  upper  line,  hence  the  difference  is  minus  i ;  and  as 
there  is  nothing  in  the  upper  line  to  subtract  from  the  last  term 
in  the  lower  line  the  difference  here  is  1.03^^  from  which  we 
subtract  the  minus  i,  leaving  1.03^^ — i  to  be  divided  by  .03; 
•showing  again  why  the  ratio  is  raised  to  its  loth  power.  It 
follows  then  that  if  $1  invested  on  the  above  terms  and  con- 
ditions will  amount  to  11.463873  the  sum  necessary  to  produce 
a  Sinking  Fund  of  $20,000  can  be  found  by  dividing  11.463873 
into  20,000.  We  do  this  and  find  the  quotient  to  be  $1744.61 
and  this  is  the  amount  of  our  periodical  contribution  to  the 
Sinking  Fund. 

Illustrating  Third  Method. 

379.  The  third  method  is  what  is  known  as  the  instalment 
or  annuity  method  and  applies  more  especially  to  municipal 
bonds,  which  are  advertised  for  sale  and  the  entire  issue  sold 
to  the  highest  bidder;  in  which  case  the  city  or  school  district, 
as  the  case  may  be,  instead  of  accumulating  a  Sinking  Fund 
which  might  be  manipulated  by  unscrupulous  politicians  pays 
equal  periodic  instalments  to  the  bondholders',  which  instal- 
ments will, in  the  given  number  of  periods  pay  both  the  prin- 
cipal and  interest  on  the  bonds.  This  method  may  be  applied 
in  any  case  where  the  whole  issue  has  been  taken  by  one  man, 
one  set  of  men,  or  an  Underwriting  Company.* 

380.  Here  the  Sinking  Fund  problem  resolves  itself  into 
*Vide  paragraph  323. 


152  CORPORATION    ACCOUNTING 

this  :  We  issue  $20,000  worth  of  bonds  bearing  3%  compound 
interest  for  10  periods ;  in  other  words,  we  borrow  $20,000  at 
.3%  compound  interest  and  we  agree  to  pay  back  both  prin- 
cipal and  interest  in  10  equal  periodic  payments;  what  must 
be  the  amount  of  each  instalment,  the  first  one  to  be  paid  at 
the  end  of  the  first  period  ?  This  we  observe  is  a  purely  annuity 
proposition.  We  are  given  the  present  value,  the  time,  and  the 
interest  rate  and  we  are  asked  to  determine  the  amount  of  the 
instalments. 

381.  $20,000  is  the  present  value  of  the  annuity;  that  is, 
$20,000  paid  at  present  would  liquidate  the  debt;  so  we  find 
out  first  what  the  present  value  of  ten  $1  payments  would  be, 
then  by  simple  proportion  we  learn  the  periodic  instalment 
necessary  to  discharge  the  $20,000  debt  and  interest  thus : 

382.  If  a  $1  instalment  pays  a  debt  of  the  present  value  of 
$8.530201,  what  instalment  will  pay  a  debt  of  the  present  value 
of  $20,000?  (Note — all  problems  in  proportion  are  proved  by 
comparing  the  product  of  the  means  with  the  product  of  the 
extremes,  and  where  the  third  term  is  i,  as  in  this  case,  we  do 
not  need  to  state  our  proposition,  but  simply  divide  the  present 
value  of  $1  for  the  10  periods  into  $20,000,  the  quotient  is  the 
required  instalment). 

383.  We  obtain  the  present  value  of  an  Annuity  of  $1  for 
10  periods  at  3%  by  dividing  the  amount  of  an  Annuity  of  $1 
for  10  periods,  by  the  amount  of  $1  at  compound  interest  for 
10  periods,  hence  the  formula  : 

1.03^^ — I  1.03^° —  I 


1.03^^ 


.03  1. 03^"  X. 03 

Working  this  out  we  find  that  the  loth  power  of  1.03  is 
'$1.34391619;  subtracting  i  and  dividing  by  .03  we  obtain  (as 
previously  shown)  $11.463873.  This  is  the  amount  of  an  An- 
nuity of  $1  for  10  periods  at  3%  comopund  interest,  and 
$1.343916,  as  we  have  seen,  is  the  amount  of  $1  at  3%  com- 
pound interest  for  10  periods;  therefore,  we  divide  1.343916 
ino  11.463873  and  obtain  the  quotient  8.530201.  This  quotient 
is  the  present  value  of  ten  $1  instalments  estimating  the  value 
of  money  at  3%  compound  interest  for  each  period;  that  is  to 
say,  Ave  can  discharge  a  debt  of  $8.530201  and  the  accruing  in- 
terest thereon  by  paying  10  periodic  instalments  of  $1  each, 
and  as 

$20,000 

=  $2344.61,  we  see  that  by  paying  $2344.61  every 


8.530201 


AND   CORPORATION   LAW 


153 


period  for  lo  periods  we  pay  off  the  bonds  of  $20,000  and  in- 
terest. Now,  the  interest  on  $20,000  for  six  months  at  3%  is' 
$600  and  if  we  subtract  this  from  $2344.61  we  get  $1744.61  as 
the  amount  of  our  Sinking  Fund  for  the  first  six  months ;  but 
instead  of  investing  it  as  in  the  previous  example  we  turn  it 
over  to  the  bondholders  to  invest  as'  they  please;  and  as 
money  is  theoretically  worth  3%  to  either  party,  neither  side 
loses  by  this  method  of  payment.  The  amount  of  our  contri- 
bution the  second  period  would  be  $1744.61  plus  the  interest  on 
this  at  3%,  because  the  principal  has  been  reduced  by  the  first 
payment;  and  less  of  the  second  instalment  goes  to  interest 
and  more  to  principal  and  so  on  to  the  end.  Now  if  we  mul- 
tiply the  instalment  by  10  we  get  $23446.10  as  the  total  amount 
we  pay  the  bondholders  and  deducting  the  principal  thus 
$23446.10 — $20,ooo=$3446.io;  the  total  interest  we  pay.  Note 
that  by  either  of  the  last  two  methods  the  Sinking  Fund  is 
the  same. 

384.     Following  is  a  table  showing  the  present  value  of  $1 
from  one  to  ten  periods'  at  3%  compound  interest: 


$1 
I 
I 
I 
I 
I 
I 
I 
I 
I 

Total  $10 


ue   I   period  hence  at 
2 

3 

4 
5 
6 

7 
8 

9 
10 


3% 


Present  Value 

-  .970873 

=  .942596 

=  .915141 

=  .888487 

--  .862608 

=  .837484 

=  .813092 

=  .789409 

=  .766417 

=  .744094 


$8.530201 


385.  This  table  proves  the  formula  as  we  see  by  the  addi- 
tion of  the  ''present  value"  column.  The  present  value  of  $1 
for  any  number  of  periods'  may  be  found  by  dividing  $1  by  the 
amount  of  $1  at  compound  interest  for  the  number  of  periods, 
and  the  compound  interest  may  be  found  by  the  use  of  a 
logarithm  table  thus :  the  log.  of  1.03  is  .0128372  ,the  log.  of  the 
loth  power  is  found  by  multiplying  by  10,  that  is,.  0128372  X 
10^.1283720  and  the  natural  number  corresponding  to  this  is 
1.343916. 

386.  Another  phase  of  the  Sinking  Fund  problem  is  this : 
If  I  purchase  $100,000  4%  bonds  with  5  years  to  run  at  106., 


154  CORPORATION   ACCOUNTING 

that  is,  if  I  pay  a  premium  of  6%,  or  $6000  and  I  shall  get  only 
$100,000  on  the  bonds'  at  maturity  I  must  provide  a  Sinking 
Fund  to  wipe  out  the  premium  by  that  time.  Suppose  again 
that  I  can  invest  this  Sinking  Fund  at  3%  :  Hbre  v^e  have 
another  geometrical  series  of  10  terms,  and  as  we  know  by  this 
time  the  loth  power  of  $1  at  3%  is  $1.343916  and  the  sum  of 
the  series  is  $11.463873,  which  divided  into  $6000  gives  us  as 
the  quotient  $523.37,  or  the  amount  to  set  aside  and  invest  for 
Sinking  Fund  purposes.  Now,  we  get  $2000  interest  on  the 
bonds  every  six  months ;  so  when  we  get  the  interest  we  debit 
Cash  for  the  $2000,  crediting  Revenue  Account  or  Interest 
with  $1476.63  and  ''Sinking  Fund  Account"  with  $523.37.  We 
then  credit  Cash  and  charge  ''Sinking  Fund"  with  $523.37,. 
which  we  invest  as  above.  At  the  end  of  the  5  years  we  have 
a  Sinking  Fund  of  $6000,  and  we  balance  "Sinking  Fund"  into 
"Sinking  Fund  Account,"  convert  the  Fund  and  the  bonds  into 
cash,  debit  Cash  for  $106,000  and  credit  our  "Bond  Invest- 
ment"; wiping  out  the  bond  and  premium  and  closing  the 
whole  transaction. 

387.  Where  bonds  are  not  all  sold  within  the  first  six 
months  the  Sinking  Fund  for  those  sold  later  must  be  con- 
structed on  a  different  period  basis. 

388.  The  foregoing  should  convey  to  the  student  at  least 
an  elementary  knowledge  of  the  principles  involved  in  con- 
structing a  Sinking  Fund.  These  principles  mastered  he  can 
construct  a  Sinking  Fund  for  any  number  of  terms ;  taking  ad- 
vantage, if  possible,  of  a  table  of  logarithms  to  find  the  nth 
power  of  I. 

Funds  vs.  Accounts. 

389.  A  "Fund"  is  created  out  of  the  cash  assets  of  a  busi- 
ness (a)  for  the  purpose  of  amortizing  a  known  and  existing 
liability  such  as  a  bonded  indebtedness,  (b)  for  the  purpose  of 
providing  an  available  or  quick  asset  to  meet  a  specific  obliga- 
tion of  the  future  such  as  the  renewal  or  betterment  of  a  plant 
or  (c)  for  the  purpose  of  meeting  a  possible  embarrassing  con- 
tingency ;  (a)  is  in  a  sense  a  matured  obligation  and  is  there- 
fore a  fixed  charge  against  revenue,  (b)  is  a  deferred  obliga- 
tion, therefore  not  a  fixed  charge  and  need  only  be  made  when 
conditions  justify  it,  (c)  is  only  a  potential  obligation  and  need 
only  be  provided  for  when  there  are  abundant  cash  assets'  avail- 
able for  investment.  Where  a  corporation  is  obliged  to  set 
aside  from  the  earnings  of  each  year  a  certain  amount  of  cash 
for  a  "Sinking  Fund"  investment,  it  rarely  creates  other  funds. 


AND   CORPORATION   LAW  155 

as  this  would  be  withdrawing  from  active  employment  in  the 
business  a  portion  of  its  working  capital.  Instead  it  creates' 
reserve  accounts  to  support  diminishing  assets^or  to  meet  con- 
tingencies ;  that  is,  after  ascertaining  the  net  profits  it  transfers 
a  portion  to  certain  accounts,  such  as  ''Reserve  for  Deprecia- 
tion," "Reserve  for  Contingencies"  and  the  balance  is  trans- 
ferred to  Surplus  Account  where  it  is  available  for  dividends. 
In  this  way  sufficient  of  the  Surplus  Assets  are  reserved  to 
offset  depreciation  and  provide  against  contingencies.  Briefly 
then,  Funds  are  Cash  Assets  set  aside  from  the  earnings  of  the 
business  and  invested  in  Securities.  Reserves  are  apportion- 
ments of  the  earnings  withheld  from  the  surplus  and  carried 
on  the  books  as  a  liability.  This  Hability  is  of  course  a  capital 
liability  and  joined  with  surplus  and  capital  -is'  the  correlative 
of  the  Excess  Assets  of  a  concern  over  its  liabilities  to  credit- 
ors. With  this  explanation  we  will  proceed  to  a  definition  of 
various  Funds  and  Accounts. 

Redemption  Fund. 

390.  This  term  might  with  propriety  be  applied  to  a  Sink- 
ing Fund,  as  a  fund  accumulated  to  redeem  outstanding  obli- 
gations at  the  end  of  a  certain  time.  The  term  as'  used  by  the 
Treasury  Department  of  the  United  States  has  a  different 
meaning.  It  is  a  Fund  of  5%  of  a  National  Bank's  circulation 
which  every  National  Bank  is  required  to  deposit  with  the 
United  States  Treasurer  for  the  purpose  of  redeeming  its  worn 
out,  or  unfit  currency,  when  the  same  comes  into  the  Treasury 
Department  for  exchange  or  redemption — treated  more  fully 
in  chapter  on  The  National  Banking  System. 

Reserve  Fund. 

391.  This  may  be  created  out  of  revenue  and  invested 
same  as  a  Sinking  Fund ;  but  instead  of  being  accumulated  to 
meet  an  outstanding  obligation  it  is  reserved  for  some  specific 
purpose  such  as  the  purchase  of  additional  property,  the  en- 
largement of  the  plant,  or  the  erection  of  a  new  building — in 
this  latter  case  it  might  be  called  a  Building  Fund. 

Contingent  Fund. 

392.  This  may  be  created  in  the  same  way  as  the  preced- 
ing funds ;  but  instead  of  being  created  for  some  specific  pur-^ 
pose  or  reserved  for  a  particular  occasion,  it  is  set  aside  tO' 
meet  unforeseeable  contingencies.  It  is'  a  quick  asset  that  can- 
be  levied  on  to  meet  emergencies ;  a  friend  to  be  relied  on  in 


156  CORPORATION    ACCOUNTING 

case  of  stress  and  under  certain  conditions  a  wise  provision 
against  extraordinary  losses  and  serving  to  maintain  the  sta- 
bility and  integrity  of  the  Sinking  Fund  in  o&  years. 

Depreciation  Fund. 

393.  This  is  a  fund  set  aside  periodically  from  the  earn- 
ings of  the  company,  corresponding  in  amount  to  the  decrease 
in  value  of  fixed  assets  caused  by  wear  and  tear  of  machinery, 
etc.  The  amount  of  the  fund  should  at  all  times  be  sufficient 
to  restore  a  plant  to  its  original  efficiency. 

Philosophy  of  Depreciation. 

394.  Machinery  commences  to  depreciate  the  moment  the 
wheels  start  moving;  friction  alone  causes  wear,  and  buildings 
and  other  improvements  are  imparied  by  the  effluxion  of  time ; 
and  as  this  is  caused  by  the  actual  employment  of  these  things 
in  producing  revenues  the  loss  occasioned  is,  as  a  matter  of 
course,  a  charge  against  Revenue,'''  hence  this  fund  is  taken  out 
of  revenue  before  ascertaining  the  profits  and  is  set  aside  for 
the  purpose  of  renewing  or  bettering  the  Plant — not  for  the 
purpose  of  repairs  as  explained  further  on.  There  are  three 
ways  of  providing  for  this  depreciation.  First,  by  revaluing 
the  plant  every  fiscal  period  and  increasing  the  Depreciation 
Fund  by  the  amount  of  the  shrinkage  in  value.  Second,  by 
estimating  the  life  of  the  plant  and  writing  off  a  percentage  of 
the  cost  equal  to  the  number  of  years  (of  estimated  life)  di- 
vided into  100;  that  is  to  say,  if  the  life  of  the  plant  is  esti- 
mated at  5,  10  or  20  years  the  percentage  would  be  20,  10  or  5, 
respectively.  Third,  by  writing  off  a  percentage  on  diminish- 
ing values  instead  of  on  cost. 

395.  The  first  method  seems  logically  correct,  if  we  as- 
sume that  the  appraisement  is  intelligent  and  just;  that  is",  if 
the  appraisers  have  technical  knowledge,  are  disinterested  in 
the  showing  as  the  result  of  their  appraisement,  and  are  free 
from  bias,  prejudice,  or  influence  in  their  conclusions. 

396.  The  second  method  is  unsound,  unscientific,  and 
mathematically,  if  not  morally  wrong.  By  taking  off  a  per- 
centage of  the  cost  each  year  we  would  eventually  arrive  at  a 
time  when  the  value  would  be  zero — a  condition  which  cannot 
exist  in  anything  having  tangible  qualities.  There  must  be  a 
residue.  There  must  be  left  at  least  scrap  of  the  machinery, 
and  salvage  of  the  building;  and  further,  it  is  a  known  fact 

*Vide  paragraph  405. 


AND   CORPORATION   LAW  157 

that  depreciation  or  decay,  like  disease,  makes  greater  ravages 
in  its  final  stages,  and  by  writing  off  equal  allowances  in  the 
early  and  later  life  of  the  Plant  and  Machinery  we  make  an 
incorrect  showing  on  the  Balance  Sheet.^ 

397.  The  third  method  is  generally  conceded  to  be  safe 
and  scientific.  Take  for  example  a  machine  whose  estimated 
period  of  usefulness  is  limited  to  5  years  on  a  basis  of  $100 
valuation.  The  first  year  its  book  value  would  be  reduced  to 
$80,  the  second  year  to  $64,  and  the  fifth  year  to  $32.77.  The 
first  year  we  would  write  off  $20  and  the  fifth  year  only  $8.19. 
This  would  make  an  average  of  13.45%,  against  20%  by  writ- 
ing off  the  percentage  on  cost.  Now  the  question  may  be 
asked,  why  do  we  not  write  off  13.45%  each  year  as'  it  would 
be  more  equitable  and  leave  the  same  residual  value,  that  is, 
$100— (13.45  X  5)=$32.75?  At  first  glance,  or  suggestion, 
this  might  appear  the  most  equitable  way  of  charging  lost 
capital  against  revenue,  but  it  is  not.  The  element  of  repairs 
enters  into  our  calculations  here.  Everybody  knows  that  re- 
pairs are  necessary  to  keep  up  the  standard  of  efficiency,  and, 
barring  accidents,  the  cost  of  repairs  is  smaller  during  the 
early  life  of  a  machine  than  toward  the  close  of  its  period  of 
usefulness;  therefore,  while  we  charge  off  more  for  deprecia- 
tion in  the  beginning  and  less  toward  the  end,  we  equalize  this 
by  charging  off  less  for  repairs  in  the  beginning  and  more  to- 
ward the  end ;  for  it  should  be  clearly  understood  that  repairs 
are  a  revenue  expense,  and  should  be  charged  against  revenue 
and  in  no  case  should  they  be  charged  up  to  plant  or  ma- 
chinery, excepting  that  in  the  case  of  serious  accident  where 
the  cost  of  repairs  is  great,  the  burden  need  not  be  borne  by 
the  revenue  of  the  period  in  which  the  accident  occured,  but 
may  be  distributed  over  a  number  of  periods.  As  a  matter  of 
fact,  in  the  actual  running  of  a  plant,  depreciation  and  repairs 
will  not  work  out  with  the  same  mathematical  nicety  with 
which  we  can  evolve  theories;  yet,  by  having  an  intelligent 
theory  and  system  to  proceed  on,  and  by  study  and  care,  we 
can  come  so  near  the  truth  as  to  be  able  to  say  that  our  Balance 
Sheet  is  approximately  correct,  that  it  is  honest;  and  that  is 
the  most  we  can  say  in  any  case ;  for  even  the  most  skilled  and 
most  expert  appraisers  only  estimate  values.  There  are  two 
other  points  to  be  considered  in  this  connection :  Different 
machines  and  different  items  of  a  Plant  have  different  longe- 
vity, and  it  is  better  to  figure  these  parts  separately  than  to 
figure  the  plant  as  a  whole  in  estimating  depreciation.  Again, 
improved  machinery  and  improved  methods  often  cause  far 

iVide  paragraph  440. 


158  CORPORATION    ACCOUNTING 

more  depreciation  than  wear  and  tear;  and  sometimes  it  may 
be  more  profitable  to  throw  out  good  machines  than  to  com- 
pete with  them  against  better  ones.  In  such  cases  our  calcu- 
lations may  go  awry  and  a  "Contingent  Fund"  or  ''Reserve  for 
Contingencies"  may  save  us  from  serious  embarrassment.  The 
income  on  all  funds,  with  the  exception  of  "Sinking  Fund"  may 
be  credited  to  revenue. 

398.  The  second  way  of  treating  depreciation  is  to  debit 
Profit  and  Loss  and  credit  a  "Depreciation  Account"  for  the 
amount  of  the  depreciation.  This  would  charge  revenue  for 
the  amount  of  the  depreciation  and  as  Depreciation  Account 
would  appear  as  a  liability  it  would  offset  the  book  value  of 
the  plant  to  that  extent  and  make  a  correct  showing  of  the 
"Plant"  on  the  ''Balance  Sheet"  thus: 

Plant  Dr.  $1000.     Depreciation  Account  Cr.  $100,  or 
Plant  $1000 

Less  depreciation  100      $900 


399.  The  third  way  of  treating  it  is  to  debit  "Profit  and 
Loss"  and  credit  "Plant  and  Machinery"  for  the  amount  of 
depreciation.  This  will  also  show  the  proper  charge  to  reve- 
nue, and  the  Plant  Account  will  also  show  correctly  on  the 
Balance  Sheet;  but  in  neither  of  these  last  two  cases  will  a 
fund  have  been  set  aside  for  the  inevitable  time  when  the  plant 
will  need  renewing,  and  the  inexorable  law  of  depreciation  and 
decay  shall  call  for  the  purchase  of  new  machinery,  etc.  Of 
course  it  may  be  argued  with  good  reason,  that  this  money 
can  be  more  profitably  employed  as  "Working  Capital"  instead 
of  "Invested  Capital" ;  or  that  the  company  would  have  an  in- 
creasing cash  surplus  every  year ;  or  that  bonds  could  be  is- 
sued or  money  borrowed.  If  we  admit  the  first  argument,  the 
money  would  be  converted  into  some  other  form  of  asset,  and 
would  not  be  available  as  a  quick  asset  for  our  purposes',  al- 
though it  might  form  the  basis  of  security  for  a  loan.  For  the 
second  argument:  Idle  money  is  wasted  money;  and  there 
is  always  a  temptation  to  pay  out  such  money  in  dividends. 
For  the  third  argument :  We  would  be  discounting  the  future, 
burdening  our  enterprise  with  a  debt  on  which  we  have  to  pay 
interest  as  well  as  to  provide  for  the  payment  of  the  principal , 
both  of  which  would  cut  down  dividends;  therefore,  the  safest, 
most  conservative,  and  most  equitable  method  is  to  establish 
3  Depreciation  Fund,  providing  the  business  can  afford  the 
withdrawal  of  assets  for  this  purpose.  If,  however,  it  prevents 
the  development  or  extension  of  the  business  a  Depreciation 
Account  should  be  carried  instead. 


AND   CORPORATION   LAW 
Depreciation  Account. 

400.  There  is  a  confusion  of  ideas  in  the  minds  of  many 
good  book-keepers  regarding  the  use  of  the  terms  "Fund"  and 
''Account."  *  A  'Tund"  always  represents  an  asset ;  hence,  it 
is  always  a  debit.  An  "Account"  may  represent  either  an  as- 
set or  a  liability ;  but  a  credit  balance  can  never  be  designated 
a  ''Fund."  Depreciation  Account  represents  the  amount  which 
a  plant  has  depreciated  since  purchase.  Where  this  account  is 
kept  the  original  cost  or  value  of  the  plant  always  shows  on 
the  books, — many  preferring  that  the  cost  of  plant  should  al- 
ways' show  on  the  books,  the  difference  between  cost  and  de- 
preciation showing  present  value.  This  present  value  is  re- 
stored to  original  value  by  the  addition  of  the  Depreciation 
Fund  or  the  inclusion  of  the  assets  equivalent  to  Depreciation 
Account.  "Depreciation  Fund"  is  an  asset;  "Depreciation 
Account,"  a  liability,  which  is  offset  by  a  corresponding 
amount  of  assets  employed  in  the  business,  instead  of  being 
withdrawn  as  in  the  case  of  Depreciation  Fund.  This  liability 
has  nothing  to  do  with  creditors,  but  exists  only  as  to  stock- 
holders, therefore  Depreciation  Account  is  a  capital  liability. 

Reserve  Account. 

401.  Every  well  regulated  business  institution  takes"  into 
consideration  the  self-evident  truth  that  book  accounts  are 
never  worth  their  face  as  an  asset;  that  even  if  they  should 
all  be  collectible  it  costs  something  to  make  these  collections, 
and  that  deferred  money  is  not  as  valuable  as  money  in  hand. 
For  these  reasons  they  should  never  be  stated  at  their  full 
book  value  on  the  "Balance  Sheet" ;  but  a  certain  percentage 
should  be  credited  to  a  "Reserve  Account"  as  an  offset  against 
their  book  value,  under  the  caption  "Reserve  for  Collections," 
"Reserve  for  Bad  and  Doubtful  Accounts,"  or  some  such  title. 
The  accounts  would  then  appear  on  the  Balance  Sheet  in  this 
way: 

Accounts'  Receivable — book  value  $10,000 
Less  2%  reserve  for  contemplated 

losses  200      $9,800 


402.  The  last  figures  would  be  the  asset  value  of  the  ac- 
counts. Of  course,  it  goes  without  saying  that  no  hard  and 
fast  rule  can  be  laid  down  for  estimating  this  reserve.      As  in 

*Vide  paragraph  389. 


160  CORPORATION    ACCOUNTING 

Other  cases,  study  and  experience  can  alone  determine  this 
amount.  EHminating  from  consideration  the  cost  of  collec- 
tions, which  in  a  going  business  is  constant  and  as  constantly 
charged  against  revenue,  we  can  compare  period  by  period, 
the  losses  sustained  with  the  losses  estimated,  and  thus  find 
an  average  reserve  to  meet  ordinary  conditions. 

Secret  Reserve. 

403.  The  propriety  of  creating  a  secret  reserve  is  a  matter 
of  disputation  and  discussion  among  the  highest  authorities". 
A  "Secret  Reserve"  is  created  by  the  undervaluation  of  fixed 
assets,  or  the  writing  off  of  excessive  depreciation  on  those 
assets.  It  is  secretly  concealing  and  withholding  from  the 
Balance  Sheet  or  Statement  of  Assets  and  Liabilities  a  certain 
amount  of  the  earnings  of  a  company,  for  the  ostensible  pur- 
pose of  strengthening  it  by  making  an  ultra  conservative  state- 
ment of  its  resources.  It  is  a  sort  of  "tuck"  taken  in  in  times 
of  prosperity,  that  can  be  let  out  in  times  of  adversity  to 
cover  trade  losses'  and  show  a  company  in  a  sound  condition 
notwithstanding  reverses.  Mr.  Francis  W.  Pixley,  F.  C.  A., 
one  of  Great  Britain's  foremost  accountants  and  authors,  in  a 
paper  read  before  the  Congress  of  Accountants"  at  the  World's 
Fair  at  St.  Louis  in  1904,  makes  use  of  the  following  remark- 
able language:  'T  am  of  opinion  that  what  are  known  as 
''secret  reserves"  are  right  and  proper,  and  tend  toward  the 
maintenance  of  the  company  as  a  permanent  institution,  and 
that,  in  fact,  without  these  secret  reserves  it  is  quite  impossi- 
ble, having  regard  to  the  fluctuation  of  both  financial  and  trad- 
ing operations,  for  any  company  to  exist  beyond  a  very  fimited 
period.  At  the  same  time  these  reserves  must  be  honestly 
made  and  in  the  interests"  of  the  company.  For  Directors  to 
create  secret  reserves  with  the  object  of  withholding  profits 
legitimately  earned  from  distribution  to  the  shareholders,  so 
as  to  induce  them  to  dispose  of  their  holdings  *  *  *  is  as 
flagrant  an  act  of  dishonesty  as"  can  be  conceived."  I  confess 
the  highest  respect  for  Mr.  Pixley's  opinion,  and  yet  it  is  not 
merely  the  privilege  of  every  man  to  hold  single  opinions  on 
any  subject,  but  it  is  his  duty  to  defend  those  opinions  that 
appeal  to  his  convictions ;  and  notwithstanding  the  preponder- 
ating weight  of  Mr.  Pixley's"  opinion,  "I  am  of  opinion"  that 
''secret  reserves"  are  not  necessary  to  the  existence  of  any 
company;  further,  that  they  are  always  ethically  and  fre- 
quently morally  wrong.  First  as  to  their  necessity:  Every 
well  balanced  board  of  directors  will  provide  a  "fund"  or  "re- 
serve" of  some  kind  to  meet  contingencies  that  may  arise  dur- 


AND    CORPORATION   LAW  161 

ing  periods  of  business  depression ;  and  certainly  no  competent 
board  of  directors  will  reduce  their  surplus  below  a  safe  level 
by  paying  it  all  out  in  dividends.  A  Contingent  Fund  and  a 
good  margin  of  surplus  or  a  "Reserve  for  Contingencies"  with- 
out the  fund  will  answer  the  purpose  of  a  secret  reserve.  It 
will  be  there  in  plain  sight,  as  an  emblem  of  security,  a  be- 
getter of  confidence  and  it  can  be  drawn  on  in  emergency 
more  easily  and  more  gracefully  than  an  awkwardly  resur- 
rected ''secret  reserve."  Secondly,  as  to  the  ethics  of  it:  It  is 
a  commonly  accepted  principle  of  the  practice  of  auditing  and 
investigation  to  see  that  neither  the  assets  nor  liabilities  are 
overstated  nor  understated  on  the  Balance  Sheet,  so  called; 
that  is,  that  the  statement  as  taken  from  the  books  is  not 
merely  correct,  but  that  the  facts  and  conditions  (physical  and 
otherwise)  on  which  the  book  accounts  are  based  are  also  cor- 
rect. The  company  books  should  represent  existing  conditions 
as  nearly  as  possible.  To  deny  this  is  to  pave  the  way  for  a 
dangerous  code  of  ethics ;  for  if  it  be  wrong  to  swell  an  asset 
it  is  also  wrong  to  shrink  one,  and  if  we  permit  the  books  to 
be  falsified  in  one  particular,  we  may  wake  up  to  the  fact, 
some  time,  that  the  deceivers  have  themselves  been  deceived. 
Thirdly,  as  to  the  morals  of  it :  Mr.  Pixley  has  himself  raised 
the  question  of  fraud.  He  adds  "Should  auditors  have  any 
reason  to  believe  that  reserves  are  being  created  through  im- 
proper motives  they  should  protest  against  this,  and,  if  neces- 
sary, so  report  to  their  stockholders."  Now,  auditors,  like  de- 
tectives, though  skilled  in  the  methods  of  deception  are  never- 
theless fallible  men,  and  plausible  reasons  are  not  always  cor- 
rect ones.  The  auditor  lacks  the  omnispective  eye  that  pene- 
trates the  motives  of  men  and  is  limited  in  his  conclusions  by 
the  bounds  of  finite  wisdom,  therefore  he  is  constrained  to 
judge  by  acts  and  not  by  motives;  but  laying  aside  the  ques- 
tion of  fraud  as  a  remote  one,  the  stockholders  are  deceived 
as  to  the  actual  condition  of  their  company  and  its  true  earning 
capacity,  and  they  may  part  with  their  stock  at  a  lower  figure 
than  if  they  knew  the  true  condition  of  affairs.  In  such  a  case 
the  directors  may  not  be  the  beneficiaries,  but  the  stockholders' 
are  the  losers,  and  the  men  chosen  to  represent  them  and  con- 
serve their  interests  are  responsible. 

Surplus  Account. 

404.  This  is  the  account  into  which  the  net  profits  of  the 
business  are  carried,  either  before  or  after  the  declaring  of 
dividends'.  It  ordinarily  represents  the  "Net  Capital"  or 
"Present  Worth"  of  a  company.      Dividends  are  rarely  if  ever 


162  CORPORATION    ACCOUNTING 

declared  for  the  full  surplus.  This  account  should  represent, 
as  its  name  indicates,  the  company's  net  surplus  over  and 
above  all  debts,  reserves,  and  fund  accounts,  therefore  the 
balance  should  always  be  on  the  credit  side  of  the  account.  If, 
however,  the  debit  balance  carried  from  Profit  and  Loss  ac- 
count should,  from  any  cause,  more  than  offset  the  credit  side 
of  the  account,  an  "Impairment  of  Capital"  account  should  be 
opened,  debited  for  the  difference  and  the  Surplus  Account 
closed.  The  "Impairment  Account"  will  then  show  the  amount 
for  which  the  capital  is  impaired,  which  is  the  net  insolvency 
of  the  company.  In  some  classes  of  business,  property  ac- 
counts, or  franchises  are  inventoried  at  more  than  their  value, 
to  prevent  such  a  showing  as  the  above ;  this  is  done  simply 
to  delude  the  stockholders,  or  the  creditors  of  the  company; 
for,  it  is  the  privilege  of  creditors,  in  many  instances',  as  well 
as  stockholders,  to  examine  the  books  of  a  corporation.*  Of 
course,  if  a  company  is  carrying  a  contingent  or  emergency 
fund  in  such  a  case,  the  "Contingent  Fund  Account"  can  be 
closed  into  the  Surplus  Account  and  the  "fund"  called  in  to 
make  good  the  impairment. 

Revenue  Account. 

405.  Revenue,  in  a  commercial  sense,  is  that  which  comes 
back  to  us  as  returns'  on  our  investments.  Broadly  speaking, 
the  capital  of  a  company  is  invested  in  an  enterprise,  and  the 
returns  on  this  enterprise  is  revenue.  Revenue  Account  then, 
is  an  account  of  the  revenue  derived  from  the  business  in  which 
we  are  engaged ;  in  other  words  an  account  of  our  gross  gain 
or  profit. 

Revenue  Receipts. 

406.  Revenue  Receipts  are  the  receipts  derived  as  the  di- 
rect result  of  our  trading,  as  distinguished  from  Capital  Re- 
ceipts resulting  from  the  sale  of  Capital  Stock,  or  the  proceeds 
of  bonds,  mortgages,  etc. 

Revenue  Expense. 

407.  Revenue  Expense,  or  revenue  expenditure,  is  the  ex- 
pense necessary  or  incident  to  the  producing  of  revenue.  For 
instance,  the  depreciation  of  plant  and  machinery  is'  caused 
by  the  employment  of  these  in  producing  revenue ;  hence  de- 
preciation is  a  revenue  expense ;  and  when  we  say  a  "charge 
against  revenue,"  we  mean  an  offset  to,  or  reduction  of  the 
gross  revenue  or  profits. 

*Vide  paragraphs  32,  82,  123  and  163. 


AND   CORPORATION  LAW  163 

Income  Account. 

408.  Income  is  the  remuneration  derived  from  skill  or 
labor  (professional  or  otherwise),  or  the  gain  or  profit  arising 
from  property,  invested  capital,  business"  or  commerce ;  hence 
when  we  speak  of  one's  income,  we  mean  the  revenue  derived 
from  his  skill,  labor,  property,  or  investments,  whether  re- 
ceived or  due  and  accrued ;  and  Income  Account  is  an  account 
of  this. 

Income  Expense. 

409.  The  acquiring  of  an  income  always  involves  an  ex- 
pense. The  laborer  has  his  living  expenses ;  he  must  be  fed 
and  clothed  to  enable  him  to  earn  an  income.  The  business 
man  has  his  commercial  expenses ;  the  property  owner  taxes 
and  up-keep  of  property;  all  these  are  income  expense. 

Profit  and  Loss. 

410.  This  is  an  account  into  which  are  carried  at  the  end 
of  each  fiscal  period  the  balances  of  all  accounts  representing 
revenue  or  profit,  and  all  accounts  representing  expenditure  or 
loss.^  Fixed  charges,  Sinking  Fund  apportionments,  deprecia- 
tion, and  current  expenses  are  charged  to  this  account;  and 
profits  arising  from  manufacturing,  trading,  or  operating,  and 
all  profits  directly  incident  thereto,  are  credited  to  it ;  the  dif- 
ference between  the  two  sides  representing  the  net  gain  or  net 
loss  for  the  period.  If  the  credit  side  is  the  largest  it  should 
be  carried  to  Surplus  Account,  and  if  the  debit  side  is  the 
largest  it  should  be  carried  to  an  Impairment  or  Deficiency 
Account.  This  account  is  the  adjustment  account  of  the 
period,  and  should  appear  on  the  books  only  during  the  time 
the  adjustment  is  being  made.  In  banks  and  financial  institu- 
tions this'  account  is  called  "Undivided  Profits."  In  these  in- 
stitutions dividends  are  declared  out  of  this  account;  and  un- 
like business  corporations,  the  balance  is  not  closed  into  sur- 
plus, but  only  a  portion  of  it — a  sufficient  amount  of  profits 
being  allowed  to  remain  in  this  account  to  charge  possible 
losses  against,  as  it  is  desired  that  the  surplus,  so  called, 
should  be  maintained  intact  in  order  to  inspire  public  confi- 
dence. The  very  name  of  the  account  "Undivided  Profits" 
suggests  to  the  public  that  it  belongs  to  the  stockholders,  and 
they  are  not  alarmed  at  its  being  reduced ;  but  it  is  diflferent 
with  "Surplus." 

iVide  paragraph  453. 


164  CORPORATION    ACCOUNTING 

Suspense  Account. 

411.  This  is  an  account  into  which  is  carried  all  items 
whose  ultimate  collection  is  doubtful,  whether  notes  or  ac- 
counts. Accounts  of  bankrupt  firms  or  individuals,  accounts 
of  deceased  persons  whose  estates  are  involved  in  litigation, 
accounts  of  those  temporarily  embarrassed,  accounts  in  dis- 
pute or  on  which  suit  is  pending,  deficiency  or  unexecuted 
judgments',  accounts  of  those  who  are  "all  right"  but  just  can't 
pay,  all  these  should  be  taken  into  suspense  account  for  final 
adjudication.  At  the  close  of  each  fiscal  period  these  accounts 
are  appraised,  and  a  certain  percentage  written  off  to  Profit 
and  Loss,  the  balance  being  carried  as  an  asset.  Only  such 
accounts,  or  parts  of  accounts,  as  are  considered  absolutely 
lost  should  be  carried  to  Profit  and  Loss,  and  then  only  at  the 
close  of  the  fiscal  period.  By  proper  arrangement  of  this  ac- 
count all  doubtful  items  can  be  kept  in  view  until  their  fate  is 
settled  or  until  hope  has  fled. 

Expense  Account. 

412.  This  is  a  very  general  term  and  includes  every  classi- 
fication of  current  expense :  Expense  account  is  usually  sub- 
divided under  many  heads,  such  as  Rent,  Fuel,  Freight,  In- 
terest, Wages,  Insurance,  Taxes,  Administration,  etc.  These 
are  all  specific  items  of  Expense,  and  then  there  is  a  ''General 
Expense"  account  for  those  items  that  are  generic  and  not  spe- 
cific. In  a  bvisiness  divided  into  many  departments  each  de- 
partment has  its  own  expense  account,  and  the  General  Ex- 
pense, and  Management  Expense,  are  pro-rated  at  the  end  of 
each  period,  or  distributed  over  all  the  departments  on  the 
basis  of  wages  paid ;  this  is  considered  by  the  best  authorities 
the  most  equitable  way  of  distributing  General  and  Adminis- 
trative Expense.  Now,  it  is  desirable  to  have  the  number  of 
accounts  in  a  General  or  Private  Ledger  as  few  as  possible 
consistent  with  good  accounting,  and  having  proper  regard  for 
the  classification  and  details  of  a  business.  This  is  done  to 
enable  one  to  review  the  general  ledger  more  easily,  and  close 
it  with  greater  facility;  hence  it  is  considered  good  practice 
to  keep  but  one  expense  account  in  the  ledger,  and  one  expense 
column  in  the  Cash  Book;  and  instead,  to  keep  an  "Expense 
Book,"  columnated  for  each  subdivision  of  Expense.  Here  all 
the  items  and  details  which  go  to  make  up  "Expense"  are  set 
forth  by  themselves,  in  the  same  manner  that  a  voucher  record 
is  kept,  and  the  aggregate  of  all  the  columns  must  agree  with 
the  "Expense  Account"  in  the  General  Ledger.     This  method 


AND   CORPORATION   LAW  165^ 

has  many  advantages.  It  reduces  the  number  of  accounts  to 
be  kept,  affords  quick  and  easy  reference  for  audit  and  review,, 
and  can  be  gone  over  and  inquired  into  any  time  without  in- 
terfering with  the  book-keeper's  work;  besides,  all  the  totals 
are  under  the  reviewer's  eye  at  the  same  time. 

Expense  Prepaid. 

413.  This  account  is  sometimes  called  'Trepaid  Charges," 
and  contains  those  items  which  have  been  paid  in  advance, 
the  amount  so  paid  being  an  asset.  This  is  an  item  that  is  but 
little  thought  of  by  the  average  proprietor  or  manager,  and 
yet,  where  short  fiscal  periods  is  the  rule  it  is  an  important 
consideration.  Take  for  instance  the  item  of  Insurance,  and 
let  us  suppose  that  a  merchant  pays  $1200  premium  on  the 
first  of  January  to  cover  his  stock  to  the  31st  of  December. 
Now,  it  would  be  obviously  wrong  to  charge  all  the  $1200  to 
Expense  in  January,  since  January's  portion  of  it  is  only  $100; 
but  you  say, — "he  has  paid  it  out  and  he  must  charge  it  up" — 
true,  but  he  should  do  it  in  this  way :  Debit  it  to  "Expense 
Prepaid,"  and,  at  the  close  of  January  debit  Expense  for  $100, 
and  credit  "Expense  Prepaid"  for  $100;  this  leaves  an  asset 
value  of  $1100  in  the  last  named  account,  owing  to  him,  so  to 
speak,  by  the  insurance  company.  By  repeating  this  every^ 
month  the  "Expense  Prepaid"  is  closed  out  at  the  end  of  the 
year. 

Expense  Anticipated. 

413.  This  is  antithetic  to  "Expense  Prepaid."  There  are 
certain  expenses  connected  with  every  enterprise  which,  in- 
stead of  being  ever  present  and  ever  pressing  in  their  demands; 
steal  along  with  sedulous  and  noiseless  tread,  growing  all  the 
while  they  march  and  finally  making  preemptory  demand  on 
us.  To  this  class  belong  taxes,  bond  interest,  etc.  Let  us 
suppose  that  we  have  $600  taxes,  or  bond  interest,  falling  due 
in  six  months  from  now,  this  would  be  an  everage  of  $100  per 
month.  Let  us  suppose  further  that  w^  are  now  in  January, 
and  this  charge  falls  due  in  July.  Should  we  wait  imtil  July 
to  make  this  charge?  Certainly  not!  The  expense  is  current 
and  continuous,  the  payment  is  merely  postponed  to  a  certain 
date.  The  proper  way  to  do  is  to  make  each  month  bear  its 
proportion  and  thus  make  a  correct  statement  of  expenses  for 
each  month,  instead  of  showing  a  false  gain  for  five  months 
and  an  abnormal  loss  on  the  sixth.  How  do  we  make  each 
month  show  its  proportionate  expense?    We  simply  debit  ex- 


.166  CORPORATION    ACCOUNTING 

pense  each  month  for  its  proper  percentage  of  expense  and 
credit  "Expense  Anticipated"  for  the  amount.  At  the  end  of 
the  period  the  ''Expense  Anticipated"  will  equal  the  amount 
we  have  to  pay,  and  the  payment  will  close  the  account  for  the 
time  being.     Now, 

"The  critic  eye,  that  microscope  of  wit 

(which)  Sees  hairs  and  pores,  examines  bit  by  bit" 

may  say  that  this  condition,  of  even  months  and  even  hun- 
dreds, would  not  manifest  itself  in  any  business ;  and  that  the 
fiscal  periods  would  not  be  co-terminal  with  the  periods  cov- 
ered by  prepaid  and  anticipated  charges ;  but,  the  principle  is 
applicable  (by  the  simple  use  of  the  ''Unitary  Method")  to  any 
number  of  dollars  or  months.  This  account  is  frequently 
designated  "Reserve  for  Fixed  Charges,"  "Reserve  for  Accru- 
ing Expenses,"  etc. 

Fixed  Expense. 

414.  "Fixed  Expenses"  or  "Fixed  Charges"  are  the  fixed, 
periodic,  recurring  expenses  of  a  business,  such  as  rent,  taxes, 
insurance,  bond  interest,  etc.  They  are  charges  against  which 
we  cannot  introduce  economic  measures  or  methods,  and 
whose  payment  we  cannot  evade. 

Franchise  Account. 

415.  A  franchise  is  a  privilege  granted  by  a  state,  county, 
or  city  to  individuals  or  corporations  to  do  a  certain  specified 
business,  such  as  to  operate  a  street  car  line,  or  railroad,  for  a 
term  of  years.  Franchises  are  granted  by  special  act  of  the 
Legislature,  or  special  ordinance  of  the  city  or  county  within 
whose  territory  the  road  or  other  enterprise  operates.  They 
are  advertised  for  sale  and  sold  to  the  highest  bidder,  but  of 
course  the  party  seeking  the  franchise  is  the  invariable  pur- 
chaser. Franchises  have  a  distinct  value  in  themselves,  apart 
from  the  real  or  personal  property  of  the  owner  thereof.  Pur- 
chasers of  such  enterprises'  should  always  bargain  for  the  fran- 
chise. A  franchise  account  should  be  opened  and  charged 
with  the  purchase  price  of  the  franchise.  This  account  having 
an  intrinsic  value  in  itself,  stands  on  the  books  as  an  asset; 
but,  a  certain  amount  of  it  is  written  off  each  year,  as'  it  be- 
comes less  valuable  as  the  term  of  its  existence  draws  to  a 
close,  and  when  the  franchise  expires  the  account  is  closed. 
While  this  is  the  generally  accepted  method  of  treating  "Fran- 
chise Account"  it  does  not  follow  that  it  is  the  correct  method. 


AND    CORPORATION   LAW  167 

In  a  growing  city,  a  street  car  franchise  becomes  more  valuable 
with  increased  population ;  still,  as  it  is  a  limited  privilege  and 
there  is  no  certainty  of  its  renewal,  some  method  has  to  be 
determined  on  by  which  its  asset  value  will  disappear  from 
the  books  at  the  time  the  franchise  expires.  Of  course,  in  the 
sale  of  a  franchise  its'  cost  or  book  value  has  nothing  to  do 
with  determining  its  market  value;  and,  in  reorganization, 
franchises  may  be  capitalized  for  many  times  their  book  value. 

Goodwill  Account. 

416.  Goodwill  is  that  intangible  quality  of  patronage  that 
attaches  to  an  established  business  and  is  presumed  to  attach 
to  it  regardless  of  change  of  ownership.  A  business  is  built 
up  by  years  of  effort  and  expenditure,  a  certain  trade  attaches 
to  it,  it  is  a  going  business,  a  demonstrated  success;  it  has  the 
goodwill  or  patronage  of  a  large  number  of  customers.  The 
proprietor  wishes  to  retire,  or  perhaps  to  incorporate,  and  he 
wants  certain  returns'  on  his  effort  and  expenditure  in  addition 
to  his  trade  profits.  You  are  willing  to  pay  for  this,  because 
you  buy  an  established  business  with  reasonable  assurance 
that  the  old  customers  will  continue  their  patronage.  You  are 
saved  from  spending  large  sums  of  money  in  advertising  and 
building  up  a  competitive  business.  You  buy  the  "Goodwill,"* 
you  get  value  received.  Goodwill  is  a  legitimate  asset;  its 
value  depending  on  many  circumstances,  such  as  location,  du- 
ration of  lease,  annual  profits,  etc.  For  instance,  the  goodwill 
of  a  candy  store  in  the  neighborhood  of  a  large  school,  or  of  a 
saloon  near  a  large  rolling  mill,  would  be  much  more  than  one 
located  in  a  residence  neighborhood.  There  is  no  uniform 
method  of  valuing  goodwill,  and  no  uniform  method  of  ac- 
counting for  it.  In  some  instances  it  is  allowed  to  stand  on 
the  books  at  what  it  cost;  in  other  instances  it  is  gradually 
written  off.  In  the  case  of  corporations,  it  is  best  to  write  it 
off ;  regarding  it  not  as  a  permanent  asset  of  the  corporation, 
but  as  a  part  of  the  cost  of  acquiring  the  assets,  a  premium 
paid  on  them  to  be  distributed  over  a  number  of  years ;  and  if 
ever  the  company  goes  into  enforced  or  voluntary  dissolution, 
there  will  be  no  large  nominal  asset  to  swallow  up  the  surplus 
or  absorb  the  capital.  This,  I  admit,  is  a  conservative  view 
and  one  that  will  not  be  generally  accepted,  as  there  is  ^  real 
wrong  in  allowing  Goodwill  to  remain  intact,  letting  each  year 
bear  its  own  burdens  and  pay  no  tribute  to  the  past. 


168  CORPORATION    ACCOUNTING 

Patent  Account,  Etc. 

417.  Patents,  trademarks,  leaseholds,  and  such  like,  are  to 
be  treated  very  similar  to  franchises.  They  are  all  special 
privileges  for  limited  periods'.  The  particular  conditions  gov- 
erning- each  must  determine  the  method  of  treating  them  on 
the  books.  A  patent  on  a  novelty  may  be  valuable  only  for 
a  season,  whereas,  a  popular  demand  may  increase  the  value  of 
a  patent  every  year. 

418.  Patents  are  frequently  the  progenitors  of  "Parent 
Companies."  An  individual  secures  a  valuable  patent.  He 
capitalizes  the  prospective  profit  of  his  patent  for  a  large 
amount,  organizing  a  corporation  under  the  laws  of  some  state 
which  permits  the  holding  of  stock  in  other  corporations.  Sub- 
sidiary corporations  are  then  organized  in  other  states  and  ter- 
ritorial rights  sold  or  licensed  in  consideration  of  a  majority 
of  the  stock  of  these  subsidiary  corporations.  These  com- 
panies operate  within  their  allotted  territory  but  are  under  the 
control  of  and  tributary  to  the  parent  company.  Parent  com- 
panies are  a  variety  of  Holding  companies.  Vide  paragraph  468. 

Trading  Account. 

419.  The  Merchandise  Account  is  the  Trading  Account 
of  a  mercantile  company.  Its  design  is  to  show  the  ''gross 
profits  on  trading."  As  ordinarily  kept  the  Merchandise  Ac- 
count has  no  value  for  statistical  purposes,  for  the  simple  rea- 
son that  it  has  two  sets'  of  values  on  each  side  and  its  balance 
represents  neither  inventory,  purchases  nor  sales'.  To  illus- 
trate :  We  charge  this  account  for  the  cost  of  merchandise, 
and  if  we  return  some  of  our  purchase  we  credit  it  with  re- 
turns— this  gives  us  a  set  of  cost  values  on  each  side,  and  when 
we  sell  merchandise  we  also  credit  it  with  the  sale,  which  is 
cost  price  plus  profit;  If  our  customer  sends  back  some  of  his 
purchase  we  debit  it  for  the  return  at  selling  price,  which  is 
also  cost  plus  profit,  thus  giving  us  cost  and  selling  price  on 
both  sides,  or  two  sets  of  values.  To  be  of  any  service  for 
statistical  or  comparative  purposes  we  must  divide  it  into  at 
least  two  divisions' — "Purchases"  and  "Sales" — the  return  pur- 
chases are  credited  to  purchase  account,  and  return  sales 
debited  to  sales  account,  and  the  balances  represent  definite 
things,  viz :  net  purchases,  and  net  sales.  Now,  as  a  matter 
of  course,  the  freight  and  cartage  on  a  bill  of  goods  are  a  part 
of  the  cost  of  acquisition  and  must  be  charged  to  merchandise 
account  to  give  us  the  true  cost  of  the  goods  laid  down;  but 
the  merchant  says   I  want  to  know  how  much  freight  and 


AND   CORPORATION   LAW  169 

cartage  I  pay.  He  can  know  this  and  still  charge  merchandise 
every  time  for  these  items  in  this  way :  When  freight  is  paid 
charge  it  through  the  Cash  Book  in  the  ordinary  way  to 
freight  account,  then  mark  it  on  the  invoice,  and  when  enter- 
ing up  the  invoice  debit  merchandise  for  first  cost  plus  freight, 
creidt  the  jobber  for  the  amount  of  his  bill,  and  freight  ac- 
count for  amount  of  freight — this  will  balance  the  books,  show 
actual  cost  of  merchandise,  and  either  side  of  freight  account 
(which  is  always  in  balance)  will  show  what  has  been  paid 
in  freight.*  If  the  merchant  has  kept  track  of  his  trading  pro- 
fits for  a  number  of  years  he  knows  about  what  his  average 
profit  is,  and  if  we  suppose  that  it  is  15%  on  total  cost,  he  may 
obtain  his  approximate  profit  at  any  time  by  dividing  115  into 
the  amount  of  sales,  the  quotient  being  the  cost  of  the  goods 
sold,  the  balance  the  profit  earned.  Having  found  this  make 
an  ordinary  entry  in  the  General  Journal,  debiting  sales  with 
the  cost  as  shown  by  quotient,  and  crediting  Purchases  with 
the  same  amount  thus  : 

Sales  Account  Dr.     $ 

To  Purchase  Account  $ 

for    approximate    cost    of    goods    sold    during 
month  of 

420.  The  balance  of  Purchase  Account  will  then  show  the 
inventory,  and  as  before  stated  the  balance  of  Sales  Account 
the  gross  or  "trading  profits."  By  grouping  the  current  and 
proportion  of  fixed  expenses  on  the  "Trading  Statement,"  and 
deducting  them  from  gross  profit  we  arrive  at  net  profit. 

421.  This  method  is  by  no  means  an  absolute  cost  system; 
nor  is  it  any  part  of  my  purpose  to  deal  with  "Cost  Account- 
ing" in  this  work,  but  it  is  a  step  in  the  right  direction,  an  im- 
provement on  the  old  method,  and,  although  only  approxi- 
mately correct,  it  can,  by  intelligent  application,  be  made  so 
nearly  correct  as  to  advise  a  merchant  when  he  is  steering 
right  and  safe  as  to  margin  of  profit,  and  to  warn  him  when  he 
is  running  on  the  shoals.  Consideration  must  be  given  to  ex- 
traordinary events  in  the  business,  such  as  enforced  sales  from 
overloading,  severe  competition,  or  unusual  expense. 

Manufacturing  Account. 

422.  This  account  is  debited  for  all  purchases  of  material 
used  in  manufacture ;  for  "freight  in,"  wages,  superintendence, 
manufacturing  expense,  all  direct  and  indirect  expense.     At 

*See  paragraphs  523,  524  and  527. 


170 


CORPORATION    ACCOUNTING 


the  end  of  each  period  it  is  credited  for  raw  material  on  hand 
and  partly  manufactured  goods,  and  the  balance  is  transferred 
to  Trading  Account;  this  balance  is  the  cost  of  the  manufac- 
tured goods. 

Controlling  Account. 

423.  This  is  a  summary  account  representing  and  controll- 
ing the  entire  sales  or  the  entire  purchases',  and  showing  in  one 
account  the  amount  that  we  owe,  or  the  amount  that  is  owing 
to  us.  Where  there  are  a  number  of  ledgers  a  separate  ac- 
count controls  each  ledger.  A  controlling  account  is  con- 
structed in  this  way :  For  our  sales  we  have  a  ''Sales  Ledger'* 
column  on  each  side  of  our  Cash  Book  and  Journal,  and  every 
item  posted  to  the  Sales  Ledger  (or  Customer's'  Ledger)  is 
entered  in  one  of  these  columns ;  then  perhaps  we  have  a  Sales 
Book.  We  post  all  the  items  in  the  Sales  Book  and  in  the 
special  columns  in  Cash  Book  and  Journal  (both  debit  and 
credit)  in  the  ordinary  way,  then  at  the  end  of  the  month  we 
take  the  footing  of  our  Sales  Book  into  the  General  Journal 
making  this  entry : 

Sales  Ledger  Account  Dr.     $ 

To  Merchandise  Sales  $ 


posting  both  these  to  their  respective  accounts  in  the  General 
Ledger.  We  then  post  the  totals  of  the  ''Sales  Ledger"  col- 
umns in  both  Journal  and  Cash  Book  to  the  same  account  and 
the  balance  of  this  account  must  show  the  amount  due  from 
our  customers  in  one  sum.  To  illustrate  let  us  suppose  the 
books  show  this'  condition : 


Dr. 

Cr. 

Sales  as  per  Sales  Book 

$10,000 

00 

Returns,  per  Return  Book 

100 

00 

Cash  received  from  Customers 

5,000 

00 

Cash  refunded  Customers 

100 

00 

Balance  due  from  Customers 

5,000 

00 

$10,100 

00 

$10,100 

00 

424.  These  totals  are  supposed  to  be  the  totals  of  "Sales" 
and  "Returns,"  also  the  totals  of  the  special  columns  in  Cash 
Book  (the  individual  sums  are  posted  to  the  customers  ac- 


AND   CORPORATION   LAW  171 

counts),  therefore  if  the  posting  has  been  done  correctly  the 
*'Trial  Balance"  of  the  Sales  Ledger  will  be  exactly  $5000, 
hence  we  know  absolutely  that  (our  additions  being  correct) 
the  Controlling  Account  shows  the  total  due ;  and  we  can  take 
a  statement  off  our  General  Ledger  before  finishing  the  post- 
ing of  the  other  ledgers,  or  waiting  to  prove  them.  In  other 
words,  the  head  bookkeeper  knows  the  totals  of  the  other 
ledgers  before  the  posting  is  done,  and  he  has  control  of  the 
situation,  as  the  balance  submitted  to  him  by  the  ledger  keep- 
ers must  agree  with  his'  balance,  as  proved  by  the  totals.  The 
columns  in  the  Journal  can  be  used  where  no  Sales  Book  or 
"Return  Book"  is  kept,  and  also  for  adjusting  errors  in  posting 
to  wrong  accounts,  etc. 

Impairment  Account. 

425.  When  the  liabilities  of  a  company  (including  its  paid- 
up  capital)  exceed  the  assets  of  a  company  its  capital  is  said 
to  be  impaired;  because  the  capital,  which  is  in  effect  a  trust 
fund*  for  the  protection  of  creditors,  has  been  eaten  into  by 
expenses  or  losses,  and  an  "Impairment  Account"  is  opened 
and  debited  with  this  amount — this  then  is  the  net  insolvency 
of  the  company.  The  only  proper  way  to  restore  such  a  com- 
pany to  solvency  is  to  levy  a  voluntary  assessment,  where  a 
legal  assessment  can  not  be  levied,  or  to  seek  a  reduction  of 
capital  by  legal  means. 

Deficiency  Account. 

426.  Deficit,  in  a  commercial  and  financial  sense,  means 
shortage;  the  amount  we  lack  or  fall  short  of  being  solvent. 
Deficiency  is  therefore  the  state  of  being  deficient  or  impaired, 
and  "Deficiency  Account"  is  practically  the  same  as  "Impair- 
ment Account" ;  with  this  difference,  that  it  is  opened  only  in 
connection  with  the  process  of  winding  up  in  insolvency  pro- 
ceedings, and  is  extracted  from  a  "Statement  of  Affairs  and 
Condition"^  as  made  up  by  the  Receiver.  Such  an  account  can 
be  constructed  in  this  way  so  as  to  show  just  how  the  defi- 
ciency occurred : 

427.  Credit  it  for  the  surplus  capital  of  the  company  at  the 
close  of  the  last  fiscal  period;  that  is,  the  surplus  over  and 
above  all  reserves.  Credit  it  for  gross  profits  as  shown  by  the 
Trading  Account.  Debit  it  for  dividends  paid,  if  any;  for  to- 
tals of  all  expenses  paid  and  incurred,  and  for  shrinkage  in 

*Vide  paragraph  289. 
iVide  paragraph  441. 


172 


CORPORATION    ACCOUNTING 


values  as  exhibited  by  "Statement  of  Affairs";  then  credit  it 
with  the  difference  between  the  two  sides,  which  will  be  the 
deficiency  as  shown  by  the  "Statement  of  Affairs."*  This  ac- 
count will  then  show  whether  the  deficiency  was  created  by  a 
falling  off  in  profits,  an  extraordinary  increase  in  expenses,  or 
a  withdrawal  of  capital  by  paying  a  dividend  when  the  com- 
pany was  not  in  a  position  to  stand  it. 


428. 


Form  of  Deficiency  Account. 


Dr. 

Cr. 

(3)  Paid  in  dividends 

(4)  Total  expenditure 

(5)  l/ost  through  failures 

(6)  Shrinkag-e  in  value  as 

shown  by  statement 
of  affairs 

$  5,000 

10,000 

5,000 

2,000 

00 
00 
00 

00 

(1)  Surplus    at    close    of 

last  period 

(2)  Gross  Profits  as 

shown  by   trading  % 

(7)  Deficiency 

$10,000 
7,000 

5,000 
$22,000 

00 
00 

00 

$22,000 

00 

00 

429.  This  shows,  first  of  all,  that  the  expenses  were  not 
merely  out  of  all  reasonable  proportion  to  the  profits,  but, 
vastly  in  excess  of  them;  second,  that  the  paying  of  a  $5000 
dividend  reduced  the  surplus  below  a  safe  margin,  and  that  if 
it  had  not  been  paid  the  company  could  have  stood  for  the 
heavy  losses  and  shrinkage  and  still  be  solvent ;  third,  that  the 
heavy  failures  were  the  direct  cause  of  insolvency.  This  of 
course  is  not  a  bad  case — not  a  typical  one.  The  creditors 
claims'  Avill  be  satisfied,  and  the  stockholders  will  lose  only 
$5000  and  the  cost  of  liquidating. 

Realization  and  Liquidation  Account. 

430.  The  best  way  to  get  a  clear  understanding  of  the 
functions  of  this  account  is  to  regard  it  as  an  individual.  Its 
name  implies  its  functions — to  realize  on  the  assets,  and  liqui- 
date the  liabilities  of  a  com^pany  that  has  ceased  to  be  "a  going 
concern."  We  charge  it  with  all  of  the  assets'  of  a  company 
and  credit  it  with  all  of  the  trade  liabilities ;  that  is,  with  all 
liabilities  except  Capital  Stock.  We  then  credit  it  with  the 
amounts  realized  on  the  assets  as  we  proceed,  and  debit  it  with 
the  amounts  expended  in  discharging  liabilities ;  also  with  all 
the  costs  and  charges  incident  thereto ;  the  balance  then  being 
carried  to  Capital  Stock  Account.  If  a  loss  results  it  is  charged 
against  the  capital,  and  shows  the  residue  available  for  distri- 


*Vid€  paragraph  441. 


AND   CORPORATION    LAW 


173 


bution  among  the  stockholders.  If  it  should  possibly  be  a 
gain  it  is  credited  to  Capital,  and  shows  that  the  stockholders 
will  receive  more  than  their  original  contribution  to  the  busi- 
ness. The  distribution  of  this  (as  we  would  pay  a  dividend 
on  the  basis  of  shares  held),  winds  up  the  concern;  presuming 
of  course  that  the  legal  costs  of  discharge  and  dissolution  have 
been  included  in  the  expense. 

Now  for  the  "why"  of  this :  We  debit  it  for  the  assets  be- 
cause it  has"  received  them  in  trust.  We  credit  for  the  liabili- 
ties because  they  are  offsets  to  the  assets.  We  credit  for  the 
sums  reaHzed  because  so  much  of  the  assets  have  been  parted 
with,  and  cash  being  received  for  same,  cash  is  debited.  We 
debit  for  liabilities  discharged  because  they  are  no  longer  off- 
sets to  assets,  and  because  cash  is  credited  when  they  are  dis- 
charged or  paid  .  We  debit  for  Realization  Expenses,  Re- 
ceiver's Commission,  etc.,  for  the  same  reason  that  they  have 
become  liabilities  in  the  process  of  liquidation  and  are  paid 
out  of,  and  have  to  be  credited  to  the  cash  realized.  To  illus- 
trate, let  us  take  the  case  of  a  company  with  $20,000  capital, 
having  $18,000  worth  of  assets,  and  trade  liabilities  amounting 
to  $5000.  Deducting  five  from  eighteen  we  find  that  it  has 
$13,000  net  assets,  against  $20,000  capital  liability;  in  other 
words,  its  capital  is  impaired  by  $7000. 

432.  We  open  a  Realization  and  Liquidation  Account  and 
charge  and  credit  as  follows : 


Realization  and  Liquidation  Account. 


Dr. 


Cr. 


(1)  Assets  Received 

(4)  Iviabilities  discharg-ed 

(5)  L<iquidation  expenses 


$18,000 
5,000 
2,000 


$25,000 


00 


(2)  Iviabilities  to  be  dis- 

charg-ed 

(3)  Proceeds  realized 

(6)  Loss  charg-ed  to  Cap- 
ital 


$5,000 
16,000 


4,000 


$25,000 


433.  Here  we  observe  that  it  cost  $4000  to  liquidate — 
$2000  expenses,  and  $2000  loss  in  realizing  on  assets.  This 
$4000  plus  the  $7000  impairment  shows  our  capital  of  $20,000 
reduced  to  $9000.  We  further  observe  that  we  received  $16,000 
from  the  sale  of  assets;  that  we  paid  $5000  to  creditors,  and 
$2000  costs,  leaving  $9000  cash  on  hand,  the  amount  of  our 
present  capital  as  shown  by  Capital  Stock  Account.  We  now 
pay  this  $9000  back  to  the  stockholders,  crediting  cash  and 


174  COEPORATION    ACCOUNTING 

closing  the  Cash  Account,  debiting  Capital  Stock  and  closing 
it  also. 

Investment  Account. 

434.  This  account  as  the  accompaniment  of  a  Sinking 
Fund  should  show  the  am^ount  of  the  Sinking  Fund  actually 
invested  in  interest  bearing  securities.  A  Sinking  Fund,  as 
we  all  know,  can  not  be  invested  to  the  exact  cent  or  dollar 
on  which  we  have  theorized.  The  Investment  Account  will 
show  the  amount  invested,  giving  details  of  the  securities  and 
the  rates  per  cent  thus  : 

435.  Investment  Account. 


100  S.P.R.R.Co.  Series  A  6%  Bonds  @ 


The  interest  on  these  bonds  goes  first  to  the  extinguishment 
of  the  premiums  paid,  and  the  balance  to  Revenue  Account 
or  interest;*  then  from  the  Revenue  or  Interest  Account  we 
draw  sufficient  to  increase  the  Sinking  Fund  to  its  allotted 
earnings  thus : 

Interest  (or  Profit  &  Loss)     Dr. 

To  Sinking  Fund  Account. 
For  anticipated  earnings  of  Sinking  Fund. 

Sinking  Fund  Dr. 

To  Cash 
6  mos.  int.  on  Fund  @  3% 

436.  Here  we  see  that  the  deficiency  between  the  con- 
templated earnings  of  the  Sinking  Fund  and  the  actual  earn- 
ings of  the  investment  of  this  fund  must  be  made  up  from  the 
revenues  of  the  period ;  this  is  done  so  that  the  "Sinking  Fund'^ 
may  be  mathematically  correct  at  the  time  of  maturity ;  and  it 
is  better  to  make  this  deficiency  up  by  a  small  charge  against 
the  revenues'  of  each  period,  than  by  a  larger  charge  against 
the  revenues  of  the  last  period.  If  by  any  possibility  the  earn- 
ings of  the  Sinking  Fund  should  be  greater  than  the  amount 
necessary  to  mature  the  fund,  the  excess  should  be  credited 
to  current  revenue. 

*Vide  paragraph  386. 


.  AND   CORPORATION   LAW  175 

Statement  of  Receipts  and  Disbursements. 

437.  This  is  a  condensed  statement  of  the  Cash  Account 
showing  the  amount  and  sources  from  which  cash  was  re- 
ceived, and  the  amount  and  purposes  of  all  payments  made. 

Statement  of  Income  and  Expenditure. 

438.  This  differs  from  the  foregoing  statement  in  that  it 
shows  the  amount  of  revenue  earned  whether  received  or  not, 
and  the  amount  of  expenses  incurred  whether  paid  or  not; 
thus',  interest  accruing  to  us  but  not  yet  received  is  an  item  of 
revenue ;  interest  owing  by  us  but  not  paid  is  an  item  of  ex- 
penditure. 

Statement  of  Assets  and  Liabilities. 

439.  Mr.  Frederick  S.  Tipson,  C.  P.  A.,  has  defined  Assets 
as  "things  owned,"  liabilities  as  "things  owed."  This  is  the 
most  terse  and  yet  the  best  definition  ever  given  of  these 
terms;  therefore  a  "Statement  of  Assets  and  Liabilities"  is  a 
statement  of  all  we  own  and  all  we  owe.  All  we  own:  All 
real  and  personal  property  at  correct  values,  and  all  solvent 
credits ;  that  is,  allowance  must  be  made  for  depreciation  and 
waste,  and  also  for  doubtful  accounts,  before  stating  our  as- 
sets as  such.  All  we  owe  :*  This  contemplates  all  our  legal  and 
moral  obligations,  matured  and  maturing,  whether  stated  on 
our  books  or  not.  With  the  addition  of  Capital  Stock  as  a  lia- 
bility the  difference  between  the  two  sides  constitutes  the 
measure  of  our  exact  worth  or  our  insolvency. 

Balance  Sheet. 

440.  This  term  is  inexactly  applied  to  a  "Statement  of 
Assets  and  Liabilities."  A  "Balance  Sheet,"  correctly  speak- 
ing, is'  a  statement  of  account  balances,  or  book  values  of  as- 
sets and  liabilities,  extracted  from  the  ledger  after  all  nominal 
accounts  have  been  closed  out ;  but,  book  values  are  not  always 
actual  values,  and  sometimes  all  the  liabilities  do  not  appear 
on  the  ledger;  hence  a  "Balance  Sheet"  might  be  mathemati- 
cally correct  and  yet  not  be  a  "Statement  of  Assets  and  Lia- 
bilities." It  is  best  to  use  exact  terms  when  we  wish  to  con- 
vey an  unequivocal  meaning. 

Statement  of  Affairs  and  Condition. 

441.  When  a  corporation  passes  into  the  hands  of  a  Re- 
ceiver he  makes  out  a  Statement  of  Assets  and  Liabilities  from 

*Vide  paragrapli  450. 


176 


CORPORATION    ACCOUNTING 


the  books  of  the  company,  taking  care  first  to  see  that  all  the 
assets  and  liabilities,  actual  and  contingent,  are  stated  on  the 
books ;  then  in  a  parallel  column  alongside  the  assets  he  ex- 
tends opposite  each  item  of  asset  as  it  appears  on  the  books, 
the  amount  he  expects  it  will  realize,  and  opposite  the  liabili- 
ties in  a  parallel  column  he  extends  the  liabilities  in  the  order 
of  their  rank  or  preference.  The  difference  between  these 
outer  columns'  is  the  amount  of  the  deficiency.  A  general  form 
from  the  books  of  a  mercantile  company  is  as  follows  :* 

Assets. 


Nominal 
Values 

Estimated 
to  Realize 

Cash  on  hand  and  in  bank 

$1,500 

00 

$1,500 

00 

Bills  Receivable — Secured 

3,000 

00 

3,000 

00 

Bills  Receivable — Unsecured 

2,000 

00 

1,500 

00 

Merchandise,  per  inventory 

30,000 

00 

27,000 

00 

Horses,  wag-ons,  etc. 

1,500 

00 

1,200 

00 

Accounts  Receivable 

11,000 

00 

9,500 

00 

Deficiency 

1,000 

00 

6,300 

00 

$50,000 

00 

$50,000 

00 

Liabilities 


Nominal 

Actual 

Liability 

Liability 

Wag-es  Due 

500 

00 

500 

00 

Bills  Payable  ^Secured  by  mortgage 

5,000 

00 

5,000 

00 

Bills  Payable— Unsecured 

7,000 

00 

7,000 

00 

Accounts  Payable 

17,500 

00 

17,500 

00 

Capital  Stock,  paid  up 

20,000 

00 
00 

20,000 

00 

$50,000 

$50,000 

00 

442.  The  above  "Statement"  shows  an  estimated  defi- 
ciency of  $6300  as  against  a  nominal  deficiency  of  $1000,  shown 
by  the  books.  We  have  here  $43,700  worth  of  assets  against 
$30,000  trade  liabilities,  which  means  that  the  company  will 
pay  dollar  for  dollar  to  its  creditors  and  have  quite  a  residue 
left  for  distribution  among  its  stockholders.  The  residue  would 
be  $13,700,  less  the  expense  attending  realization  and  the  costs 


form. 


^See  appendix  on  C.  P.  A.  Examinations    for    a    more    comprehensive 


AND    CORPORATION   LAw  177 

of  receivership  including  discharge  and  decree  of  dissolution. 
Suppose  this  cost  was  an  additional  $1700,  there  would  be 
$12,000  left  for  the  stockholders  or  a  60%  dividend  on  their 
original  subscription.  The  claims  of  creditors  would  be  paid 
in  the  order  appearing,  preferred  claims'  first  and  book  accounts 
last;  but,  if  the  failure  had  been  very  much  greater  and  the 
assets  fell  short  of  the  trade  liabilities,  say  that  the  order  was 
reversed,  and  there  was  only  $30,000  assets  against  $43,700 
liabilities,  we  would  deduct  preferred  claims  first  from  the  as- 
sets, say  $5500,  that  would  leave  $24,500  against  $38,200.  Say 
again,  the  costs  of  liquidating  were  $1700,  this  would  leave  a 
residue  of  $22,800  to  pay  the  remaining  creditors'  claims  of 
$38,200.  In  other  words,  these  creditors  would  receive  nearly 
60%  of  their  claims  and  the  stockholders  would  be  out  in  the 
cold. 

Fixed  or  Capital  Assets. 

443.  Those  assets"  that  are  a  fixed  and  necessary  part  of 
the  business  and  without  which  we  could  not  do  business — the 
things  with  which  business  is  done — are  called  "Fixed  Assets," 
or  ''Capital  Assets',"  such  as  the  fixtures  and  furniture  of  a 
store,  the  plant  and  machinery  of  a  factory,  land,  buildings, 
etc.;  also  called  "passive  assets"  for  the  reason  that  they  are 
not  active  but  acted  on ;  also  called  "Permanent  Assets"  for 
the  reason  that  they  are  a  permanent  requirement  of  a  busi- 
ness and  necessary  to  its  conduct.   Vide  paragraph  288. 

Active  Assets. 

444.  These  are  the  variable,  changeable,  active  assets  of 
the  business  which  rise  and  fall  in  quantity  and  value  from  day 
to  day  such  as  cash,  merchandise,  bills  receivable,  etc.  They 
are  also  variously  called  Floating,  Current  and  Circulating 
Assets.   Vide  paragraph  288. 

Cash  Assets. 

445.  Cash,  checks,  sight  drafts,  demand  notes  and  other 
assets  that  can  be  readily  converted  into  cash,  are  called  Cash 
Assets ;  also  called  "Quick  Assets"  for  the  reason  that  they 
can  be  converted  quickly. 

Diminishing  Assets. 

445.  These  are  divided  into  two  general  classes.  To  the 
first  class  belong  all  assets  which  either  from  use  or  the  ordi- 


178  CORPORATION   ACCOUNTING 

nary  efluxion  of  time  depreciate  or  diminish  in  value ;  such  as 
plant  and  machinery,  buildings',  etc. 

446.  To  the  second  class  belong  ore  in  mines,  oil  in  wells 
and  timber  in  forests.  The  asset  of  mines,  wells  and  timber 
is  growing  less  every  year  we  operate ;  but  the  asset  value  of 
each  is  something  that  can  not  be  easily  estimated.  It  is  a 
mere  matter  of  speculation  as  regards  the  first  two ;  and  in  the 
matter  of  the  latter  we  have  the  law  of  "growth  and  supply" 
to  offset  to  some  extent  the  ax  of  the  denuder.  These,  and 
others  of  like  class,  are  also  called  "Wasting  Assets." 

Appreciating  Assets. 

447.  Real  Estate  or  other  assets  which  appreciate  in  value 
from  year  to  year,  either  from  natural  or  artificial  causes,  are 
appreciating  or  growing  assets.  This  increment  is  a  capital 
gain,  except  in  those  cases  where  this  class  of  assets  form 
the  basis  of  trade  or  speculation. 

Capital  Liabilities. 

448.  These  are  also  called  "Passive  Liabilities"  and 
"Fixed  Liabilities,"  and  include  the  Capital  Stock  and  Sur- 
plus of  a  company,  or  its  liability  to  its  stockholders  as  dis- 
tinguished from  its  liability  to  creditors.  Mr.  Joseph  Hard- 
castle,  C.  P.  A.,  of  the  faculty  of  the  University  of  New  York, 
defines  capital  as  a  responsibility — not  a  liability. 

Trade  Liabilities. 

449.  These  are  the  liabilities  resulting  from  trading — the 
obligations  of  a  company  to  its  creditors ;  and  they  must  be 
discharged  before  any  obligation  runs  to  the  stockholder. 

Contingent  Liabilities. 

450.  Contingent  liabilities  are  those  that  are  not  absolute, 
but  the  existence  of  which  is  dependent  on  the  happening  of 
some  certain  events.  Inasmuch  as  we  are  not  safe  in  assum- 
ing that  they  are  non-existent  we  must  have  regard  for  them 
in  stating  our  liabilities,  hence  they  must  enter  into  our  Bal- 
ance Sheet  or  Statement  of  Assets  and  Liabilities.  Bills 
Receivable,  which  we  may  have  discounted  at  our  bank  or 
note  brokers,  belong  to  this  class.  If  they  are  not  paid  at 
maturity  we  shall  be  obliged  to  take  them  up.  We  are  con- 
tingently liable  to  the  bank  or  broker.  We  state  them  on  our 
Balance   Sheet  as  "Bills  Receivable   Discounted"  and   "Con- 


AND   CORPORATION   LAW  179 

tingent  Liability  on  Discount  Notes."  In  this  way  one  nega- 
tives the  other  and  the  resultant  balance  of  our  Statement  is 
not  affected,  at  the  same  time  attention  is  called  to  the  pos- 
sible existence  of  additional  liability. 

Capital  Receipts. 

451.  Money  or  property  received  in  exchange  for  the  cap- 
ital stock  of  a  corporation,  or  the  amounts  contributed  by  the 
parties  in  interest  toward  a  common  fund  to  be  employed,  as 
capital  in  the  production  of  revenue,  are  "capital  receipts." 
In  an  extended  sense  the  proceeds  of  an  issue  of  bonds  or  de- 
bentures are  capital  receipts. 

Capital  Expenditure. 

452.  Money  spent  in  the  acquisition  of  a  capital  asset,  or 
in  the  permanent  improvement  of  an  existing  one  is  "Capital 
Expense."  There  are  some  classes  of  expenses  that  are  at 
times  difficult  to  apportion  to  "Capital"  and  "Revenue"  ex- 
pense. The  rule  is :  When  in  doubt  charge  to  capital.  Gen- 
erally speaking,  these  doubts  can  be  set  at  rest  by  simply  ask- 
ing— does  this  expenditure  increase  my  equities?  If  so,  it  is 
Capital  Expense;  if  not,  it  is  Revenue  Expense.  Ordinary 
repairs  are  not  regarded  as  an  improvement,  but  merely  as 
up-keep  of  property.  The  repairing  of  doors,  windows,  walls 
or  roof  of  building,  the  overhauling  of  machinery,  new  belt- 
ing or  pulleys,  would  be  items  of  Revenue  Expense ;  but  an 
addition  to  the  building,  cementing  its  walls',  putting  on  ^  new 
truss  roof,  or  putting  in  a  new  machine,  would  be  Capital 
Expense. 

Capital  Losses. 

453-  When  any  property  is  destroyed  by  fire  or  other 
destructive  agency,  and  such  property  is  not  fully  covered  by 
insurance,  the  loss  sustained  should  be  charged  against  capital, 
because  so  much  of  our  capital  is  destroyed  or  lost.  It  should 
not  be  charged  to  Profit  and  Loss,  because  it  is  not  a  "trade 
loss"  ;*  that  is,  it  is  not  consequent  upon  trading  operations. 
The  fact  that  some  of  our  capital  has  been  wiped  out,  reduces 
our  worth  or  surplus,  hence  it  is  logical  and  ethical  to  charge 
the  loss  to  surplus  and  let  the  "Profit  and  Loss  Statement" 
show  the  profits  of  the  period  regardless  of  this'  loss.  If  we 
have  a  Contingent  or  Emergency  Fund  the  loss  can  be  made 
good  out  of  this ;  in  which  event  it  will  have  been  distributed 
over  the  years  gone  by,  the  present  will  have  been  taken  care 
of,  and  the  future  can  again  be  provided  for. 

*Vide  paragraph  410.  1 


180 


CORPORATION   ACCOUNTING 


454. 


Trading  Statement. 

Part  I. 
Purchases  and  Sales. 


Inventory  at  close  of  last 
period 

Purchases  during-  period 

Cost  of  Acquisition 

Gross    profit    carried    to 
Part  II 

Total 


$10,000 

40,000 

2,000 

16,000 
$68,000 


Net  amount  of  Sales 

Inventory,  as  of  present 
date 


Total 


$60,000 
8,000 


$68,000 


00 


Inventory  at  commencement  of  period 

10,000 

00 

Purchases  and  cost  of  acquisition 

42,000 

00 

Total 

52,000 

00 

Less  present  inventory 

8,000 

00 

Turn  over 

44,000 

00 

Sold  for 

60,000 

00 

Gross  Profit  on  Turnover '36  4-11  per  cent. 

Part  II. 
Profit  and  Loss  Account. 


Rent 

$1,200 

00 

Gross  Profit  brought  for- 

Wag-es 

5,000 

00 

ward  from  Part  I  of 

Insurance 

300 100 

Tradingf  Statement 

$16,000 

00 

Taxes 

300100 

Depreciation 

200  00 

Bad  debt  reserve 

400:00 

General  Expense 

600  00 

Net   Profit   carried  to 

Part  III 

8,000  00 

Total 

16,000 

00 

Total 

$16,000 

00 

Net  Profit  on  Turnover  18  2-11  per  cent. 


Part  III. 
Disposition  of  Net  Profit. 


Reserve  Fund 

Conting-ent  Fund 

Surplus   available  for 
Dividends 

Total 


$2,000 
1,000 

5,000 
$8,000 


Net   Profit   brought   for- 
ward from  Part  II 


Total 


$8,000 


$8,000 


00 


00 


AND   CORPORATION   LAW  181 

Trading  Statement. 

455.  A  trading  statement  is,  or  should  be,  divided  into 
three  parts.  First,  the  "Trading  Account"  showing  the  gross 
profits'  on  trading;  second,  the  "Profit  and  Loss  Account," 
showing  the  net  profits  on  trading,  exclusive  of  reserves  and 
contingencies;  third,  the  "Net  Profit  Account,"  showing  the 
disposition  of  profits.  The  foregoing  will  serve  to  illustrate 
the  form  and  functions  of  a  Trading  Statement: 

456.  The  form  illustrated  on  the  opposite  page  is  by 
no  means  an  elaborate  Trading  Statement;  it  is  simple 
but  complete  as  far  as  it  goes,  and  suggests  the  es- 
sentials' of  a  more  comprehensive  and  detailed  state- 
ment. It  explains,  by  illustration,  what  is'  meant  by  the 
"turnover,"  viz:  the  prime  cost  of  the  goods  sold.  It  is  on 
the  turnover  that  percentages  of  profit  and  percentages  of 
costs  are  estimated;  however,  these  percentages  may,  if  de^ 
sired,  be  based  on  sales,  and  in  the  case  of  retail  business  some 
very  good  reasons  are  advanced  for  doing  so;  but  the  first 
method  is  the  most  rational  and  scientific.  "Profit"  is  defined 
as  acquisition  beyond  expenditure,  or  the  excess  of  value  re- 
ceived beyond  the  cost  of  production ;  and  when  we  state  our 
profits  it  should  be  the  percentage  of  gain  over  cost  of  acquir- 
ing or  producing,  rather  than  the  percentage  of  the  sales 
which  inure  to  our  gain.  There  is  quite  a  difference  between, 
say,  20%  on  sales  and  20%  on  cost.  For  example,  if  I  buy  an 
article  for  $100  and  sell  it  for  $125,  I  have  sold  it  for  one-fourth 
or  25%  more  than  it  cost  me,  therefore  I  have  made  25% 
profit ;  but  if  I  should  figure  my  profit  on  total  of  sale,  that  is, 
what  percentage  of  the  sale-total  is  profit,  the  answer  would 
be  one-fifth  of  the  sale  or  20%.  From  this  we  can  see  how 
far  apart  two  minds  would  be,  each  with  a  different  conception 
of  the  methods  of  figuring  profit ;  this  should  lead  to  the  adop- 
tion of  a  single  standard  of  expression,  and  the  retailer  has  but 
to  learn  that  when  he  adds  20,  25,  33  1-3  or  50%  to  cost,  his 
profits  are  represented  by  the  figures'  he  marks  them  up,  and 
the  actual  dollars  he  makes  on  each  sale  is  1-6,  1-5,  1-4  or  1-3 
of  the  sale,  respectively.  Now  of  course,  if  the  foregoing 
statement  were  for  a  factory,  the  prime  cost  would  include, 
with  the  raw  material  and  the  cost  of  laying  it  down,  the  fur- 
ther cost  of  labor  and  factory  expense  necessary  to  put  the 
product  in  saleable  condition;  the  costs  beyond  this',  market- 
ing, selling  or  distributing  expense,  appearing  in  the  Profit 
and  Loss  statement,  hence  we  see  that  "Gross  Profit"  is  (a) 


182  COKPOEATION   ACCOUNTING 

the  gain  to  us  above  the  cost  of  acquisition;  (b)  the  gain  to 
us  above  the  cost  of  acquisition  and  the  expense  of  putting 
the  commodities  purchased  into  that  condition  in  which,  we 
propose  to  ofifer  them  for  sale. 

What  is  Meant  by  a  Bonus. 

457.  A  bonus  is  simply  a  present  of  property,  or  value  of 
any  kind,  donated  to  a  company  for  sentimental,  or  honorable, 
and  not  monetary  consideration.  It  sometimes  happens  that 
a  patent  is  assigned  to  a  company  for  a  certain  amount  of 
stock,  and  the  company  becoming  short  of  funds,  the  patentee 
donates  back  to  the  company  a  bonus  of  so  many  shares  of 
stock,  to  be  sold  to  obtain  working  capital;  and  sometimes 
all  of  the  incorporators  give  a  bonus  of  a  certain  number  of 
shares  each  in  proportion  to  their  holding,  for  a  similar  pur- 
pose. This'  stock  becomes  "Treasury  Stock"  as  explained  in 
paragraph  302  et  seq. 

Assessments. 

458.  An  assessment  is  a  levy  made  by  the  directors  of  a 
corporation  of  a  certain  amount  per  share  on  all  the  outstand- 
ing stock  of  the  corporation,  for  the  purpose  of  paying  its 
debts,  or  making  improvements.*  It  is  understood,  of  course, 
that  in  limited  liability  companies,  assessments  can  not  be 
levied  in  excess  of  the  par  value  of  the  stock.  The  manner 
of  levying  assessments  and  the  accounting  for  same  will  be 
treated  in  the  "Practical  Accounting"  part  of  this  work. 

Instalment. 

459.  An  instalment  is  one  of  the  aliquot  parts  into  which 
the  payment  of  the  stock  is  divided.  Some  companies  sell 
stock  to  be  paid  for  in  equal  instalments  at  regular  stated 
periods.  It  is  generally  provided  that  failure  to  pay  these 
instalments  results  in  forfeiture  of  the  stock,  either  in  part  or 
in  whole,  without  the  formality  or  necessity  of  a  sale.  Other 
companies  provide  for  the  payment  of  a  certain  amount  down, 
the  balance  to  be  paid  in  certain  percentages  on  demand;  or, 
in  such  sums  and  at  such  times  as  the  directors  may  determine 
the  needs  of  the  business  demand.  The  accounting  for  instal- 
ment payments  is  also  treated  in  the  "Practical  Accounting" 
part  of  this  work. 

*For  Notice  of  Assessment  see  paragraph   172. 


AND   CORPORATION   LAW  183 

Limited  Liability. 

460.  A  limited  liability  company  is  one  formed  under  the 
laws  of  any  of  the  states  Hmiting  the  liability  of  stockholders 
to  the  amount  of  their  subscription ;  that  is  to  say,  the  stock- 
holders are  liable  only  for  the  amount  due  on  their  subscrip- 
tions. For  example,  if  a  stockholder  has  $1,000  worth  of  stock 
on  which  he  has  paid  $500,  he  is  liable  in  case  of  insolvency 
of  the  company  for  only  $500  of  its  debts;  i.  e.,  he  loses  the 
$500  he  has  paid  and  is  liable  for  $500  more ;  so  that  his  total 
loss  is  limited  to  the  full-paid-up  value  of  his  stock.  In  all 
such  companies  the  word  ^'Limited"  has  to  be  affixed  to  the 
name  of  the  company. 

Proportionate  Liability. 

461.  Proportionate  liability  companies'  are  companies  or- 
ganized under  state  laws  similar  to  California,  where  the 
stockholders  are  at  all  times  liable  for  the  debts  of  the  com- 
pany in  proportion  to  their  holdings.* 

Double  Liability. 

462.  National  Banks  are  double  liability  corporations; 
that  is,  the  stockholders  are  liable  for  twice  the  face  value  of 
their  stock.  If  the  bank  should  fail,  they  not  only  lose  what 
they  paid  on  their  stock,  but  they  are  liable  for  just  as  much 
more.  For  instance,  if  a  man  has  $1000  of  National  Bank 
stock  and  the  bank  fails,  he  not  only  loses  the  $1000,  but  he 
may  be  obliged  to  pay  an  additional  $1000  of  its  debts. 

Unlimited  Liability. 

463.  Unlimited  Liability  or  Full  Liability  companies  are 
those  in  which  the  stockholders  are  liable  same  as  partners; 
that  is,  in  case  of  insolvency  each  stockholder  is  liable  for  all 
its  debts,  and  any  one  of  them  can  be  sued  for  the  full  amount, 
and  judgment  executed  against  him  provided  he  is  worth  the 
amount  of  the  indebtedness.  Corporations  of  this  kind  are 
rare  but  they  may  be  formed  under  the  laws  of  the  Empire 
State.  The  reason  for  organizing  such  companies  is  that 
when  their  membership  is  composed  of  substantial  men  they 
have  a  very  extensive  credit  rating. 

*Vide  paragraph  155. 


184  CORPORATION    ACCOUNTING 

Joint  Stock  Companies. 

464.  Joint  Stock  companies'  are  more  rare  than  in  former 
years ;  they  differ  from  corporations  chiefly  in  this,  that  in  the 
absence  of  statute,  the  Hability  of  the  members  is  the  same 
as  that  of  partners,  all  must  join  in  suing  and  all  must  be 
joined  when  sued.  It  was  this  troublesome  and  vexatious 
feature  that  led  up  to  legislation  creating  the  artificial  per- 
sonality of  a  corporation. 

Trusts. 

465.  We  hear  a  great  deal  about  "trusts"  now-a-days, 
but  in  reality  there  are  but  few  trusts  formed,  although  there 
are  greater  combinations  of  capital  than  ever  before.  A 
"Trust"  proper,  derives  its  name  from  the  fact  that  its  man- 
agement is  vested  entirely  in  the  hands  of  a  Board  of  Trustees 
created  for  that  purpose.  It  is  formed  by  the  organization 
or  union  of  a  number  of  corporations',  the  members  whereof 
assign  at  least  a  majority  of  their  stock  to  the  trustees,  who  in 
turn  issue  to  them  certificates  to  show  that  they  are  entitled 
to  dividends  from  the  profits  of  the  trust.  While  the  trust 
lasts  the  stockholders  have  no  vote  nor  voice  in  the  manage- 
ment of  its  affairs',  the  trustees  having  absolute  control  of 
the  business.  If  trusts  were  managed  properly  they  would 
be  a  public  good,  for,  by  combining  their  capital,  plants  and 
management,  they  could  reduce  the  cost  of  production  and 
correspondingly  reduce  the  price  to  consumers;  but  they  are 
invariably  formed  for  the  purpose  of  controlling  and  monopo- 
lizing certain  products;  and  by  reducing  the  cost  of  produc- 
tion and  increasing  the  cost  to  consumers,  the  Trust  reaps 
enormous  profits.  Anti-trust  legislation  has  largely  destroyed 
the  old  style  of  trust,  and  given  birth  to  a  newer  and  more 
dangerous  form.  The  so-called  trust  of  today  is  in  reality 
not  a  trust  at  all,  but  is  a  monopoly  greater  and  more  dan- 
gerous. "It  is  a  concentration  of  management,  with  a  cor- 
responding distribution  of  ownership,  substituting  combina- 
tion for  competition."  A  monopoly  may  be  controlled  by  a 
single  multi-millionaire,  or  by  a  number  of  millionaires  joining 
together  either  as  partners,  or  organizing  as  a  "Holding  Cor- 
poration," *  for  the  purpose  of  buying  up  a  controlling  inter- 
est in  certain  enterprises,  so  that  instead  of  acting  as  trustees 
for  others  they  absolutely  control  and  manipulate  it  for  their 
own  aggrandizement.    For  instance,  such  an  organization  could 

*Vide  paragraph  468. 


AND    CORPORATION   LAW  185 

obtain  control  of  all  the  railroads,  or  all  the  steamship  lines, 
and  they  would  have  a  legal  right  to  do  it  under  present  con- 
ditions. How  to  meet  this  problem, — that  is,  how  to  control 
or  regulate  the  trusts — is  a  matter  now  engaging  the  most 
astute  and  thoughtful  statesmen  of  the  lancj. 

Voting  Trusts. 

466.  A  voting  trust  or  "stock  pool"  as  it  is  sometimes 
called,  is  formed  by  the  stockholders  of  a  particular  corpora- 
tion subscribing  to  a  "Voting  Trust  Agreement"  whereby  they 
place  in  the  hands  of  trustees  sufficient  of  the  stock  to  effect- 
ually control  the  policies  of  the  corporation  absolutely  or  in 
certain  particulars  for  a  designated  period  of  time.  The  agree- 
ment always  specifies  the  manner  in  which  the  stock  is  to  be 
voted  at  elections  of  directors.  Its  purpose  may  be  to  insure 
minority  representation  on  the  Board,  or  to  insure  a  certain 
management  in  office  for  a  number  of  years,  or  to  insure  a 
non-partisan  board,  or  it  may  direct  the  trustees  how  to  act 
in  certain  matters  of  general  interest  or  forbid  them  to  vote 
on  certain  other  matters.  The  agreement  controls  the  trus- 
tees absolutely  and  they  are  legally  bound  to  observe  its  terms 
both  directive  and  prohibitive.  For  forms  of  Voting  Trust 
Agreements  see  Conyngton  on  Corporate  Organization 
"Forms  and  Precedents,"  pages  335-40. 

There  is  an  actual  transfer  of  the  stock  to  the  trustees  who 
issue  negotiable  trustees  receipts  therefor,  so  that  equitable 
rights*  in  the  stock  may  be  transferred  by  the  transfer  of  these 
receipts'.  The  trustees  receive  and  pay  over  all  dividends  to 
the  equitable  owners  of  the  "trusteed  stock."  This  must  not 
be  confounded  with  a  "Trust"  as  it  only  controls  one  corpor- 
ation. 

Syndicates. 

467.  A  syndicate  is  an  association  of  bankers,  capitalists', 
merchants  or  corporations  formed  for  the  purpose  of  buying 
stocks  and  bonds,  or  carrying  out  some  great  financial  enter- 
prise. The  Drexel-Morgan  Banking  Syndicate,  the  late 
Nicaragua  Canal  Syndicate,  the  Morgan  Steamship  Syndicate 
are  instances. 

Holding  Corporations. 

468.  Under  the  common  law  rule,  one  corporation  can  not 
invest  in  or  hold  the  stock  of  another  corporation.  This  rule 
was  at  first  relaxed  to  permit  of  a  corporation  taking  the  stock 

*Vide  paragraph  260. 


18G  CORPORATION    ACCOUNTING 

of  another  corporation  to  save  itself  from  loss,  or  to  retain 
stock  forfeited  to  it,  where  the  stock  was  put  up  as  collateral 
security."*"  This  gradual  relaxation  led  to  the  setting  aside  of 
the  common  law  in  several  states  and  the  enactment  of  laws 
granting  to  corporations  the  privilege  of  holding  the  stocks 
and  bonds  of  other  corporations.  Delaware,  Maine  and  New 
Jersey  have  enacted  such  laws  and  New  York  grants  this 
privilege  under  proper  charter  provision.  New  Jersey  was 
the  first  state  to  legislate  on  this  subject  and  this  is  why  so 
many  of  the  great  industrial  corporations  have  been  chartered 
under  New  Jersey  law.  The  old  "trust  method"  that  of  con- 
trolling several  corporations  by  a  board  of  trustees  was  de- 
clared illegal  and  abandoned  and  the  modern  "Holding  Com- 
panies" substituted  to  legally  and  more  effectually  control 
them.  A  Holding  Company  in  the  modern  sense  is  one  or- 
ganized for  the  express  purpose  of  holding  the  stocks  and 
securities  of  other  corporations,  not  as  a  trustee  but  as  an 
owner.  By  securing  51%  of  the  stock  of  sundry  corpora- 
tions it  may  control  them  all.  A  case  in  point  is  that  of  the 
Northern  Securities  Company  which  was  organized  to  hold 
the  stocks  of  two  competing  interstate  railways  for  the  pur- 
pose of  control  and  to  prevent  competition.  This  company 
or  merger  was  declared  illegal  by  the  United  States  courts 
on  the  ground  that  it  was  against  public  policy  and  in  re- 
straint of  trade,  and  it  is  believed  that  where  holding  corpora- 
tions abuse  their  powers  the  law  will  invariably  grant  relief. 
As  a  general  rule  the  powers  of  holding  corporations  are  ex- 
tended to  more  than  the  mere  holding  of  the  stocks  and  se- 
curities of  other  corporations  for  the  purpose  of  control.  They 
are  given  ample  powers  to  engage  in  certain  lines  of  business 
and  inasmuch  as'  the  holding  corporation  can  control  its  con- 
stituent corporations  by  owning  51%  of  their  stock  and  that 
it  can  in  turn  be  controlled  by  those  holding  51%  of  its  own 
stock  it  will  be  readily  seen  how  a  few  wealthy  individuals 
with  a  comparatively  moderate  sum  may  control  the  most  ex- 
tensive enterprise.  The  United  States  Steel  Corporation  is  a 
holding  company  of  this  latter  class. 

Stock  Allotment. 

469.  It  frequently  happens  that  companies'  with  limited 
capital  but  excellent  prospects  invite  public  subscription  to 
an  issue  of  stock  or  bonds,  and  sometimes  the  issue  is  over- 
subscribed, in  which  case  the  stock  is  allotted  to  the  subscrib- 
ers in  this  way:     If  the  total  subscription  amounted  to  125% 

*Vide  paragraphs  14,  41,  83. 


AND   CORPORATION  LAW  187 

of  the  available  stock  or  bonds  each  subscriber  would  be  al- 
lotted 80%  of  his  subscription;  if  150%  they  would  receive 
66  2-3%  of  their  subscription  and  so  on.  When  the  capital 
stock  is  increased  it  is  generally  supposed  that  the  stockhold- 
ers have  the  first  option  on  the  new  stock,  such  an  option 
in  a  prosperous  company  being  a  valuable  privilege. 

Increasing  Capital  Stock. 

470.  A  corporation  may  increase  its  capital  stock  by  com- 
plying with  a  certain  provision  of  the  laws  under  which  it  is 
organized.  It  may  also  change  its  name,  location  of  office, 
and  par  value  of  shares.  The  following  is  in  a  general  way 
the  procedure  necessary  to  increase  the  capital  stock. 

471.  The  directors  first  pass  a  resolution  that  it  is  to  the 
best  interests  of  the  corporation  to  increase  its  capital  stock, 
and  they  set  a  day  for  a  meeting  of  stockholders  to  be  held 
for  that  purpose.  Notice  of  this  meeting  must  be  given  in 
accordance  with  the  by-laws,  or  in  the  absence  of  such  pro- 
vision, in  accordance  with  the  statutes,  which  varies  in  the 
different  states  from  ten  days  to  ten  weeks;  and  from  a  mail 
or  personal  notice,  to  a  published  notice  in  a  newspaper  in  the 
county  where  the  principal  office  is  located,  as  well  as  a  mail 
notice  given  at  least  thirty  days  before  the  holding  of  such 
meeting.  The  notice  must  state  the  object  of  the  meeting, 
the  time  and  place  of  same,  and  the  amount  to  which  it  is 
proposed  to  increase  the  capital  stock.  (In  California  the  con- 
sent of  two-thirds  of  the  stock  in  interest  is  necessary.)*  A 
certificate  of  the  proceedings  must  be  filed  in  the  office  of  the 
County  Clerk  where  the  original  articles  of  incorporation  were 
filed,  and  a  certified  copy  thereof  in  the  office  of  the  Secretary 
of  State,  and  thereupon  the  capital  stock  shall  be  increased. 

472.  Entry  to  Increase  Capital  Stock. 

New  Stock  Issue  Dr.  $ 

To  Capital  Stock  $ 

or 

Nominal  Capital  Dr.  $ 

To  Capital  Stock  $ 

or 

Treasury  Stock  Dr.  $ 

To  Capital  Stock  $ 

For  increase  of  Capital  Stock  as  per  resolution  of  stock- 
holders.    Minute  Book,  page 

*Vide  paragraph  190. 


188  CORPORATION    ACCOUNTING 

473.  This  entry  shows  the  new  amount  of  the  capital 
stock.  Whenever  any  of  this  new  stock  or  treasury  stock  is 
sold  Subscription  Account  or  Stockholders,  as  the  case  may 
be,  is  debited;  and  New  Stock  or  Treasury  Stock  is  credited. 
When  it  is  paid  for.  Subscription  account  or  Stockholders  are 
credited.  When  it  is  all  subscribed  for  New  Stock  or  Treas- 
ury Stock  will  balance;  and  when  it  is  all  paid  for  Subscrip- 
tion Account,  or  Stockholders  Accounts,  or  Instalment  Ac- 
counts will  balance,  and  the  Nominal  Capital  will  then  be  the 
Actual  Capital.  When  the  stock  is  increased,  the  old  certifi- 
cates should  be  surrendered  and  new  ones  showing  the  new 
capitalization  should  be  issued.  When  this  is  not  convenient 
the  old  certificates  should  have  stamped  on  them  the  true 
capitalization  of  the  company.  If  the  par  value  has  been 
changed,  the  same  change  in  old  certificates  applies. 

Reducing  Capital  Stock. 

474.  The  proceedings  in  this  case  are  similar  to  those  of 
increasing,  the  same  notice  is  required  and  the  same  vote  of 
the  stockholders'  is  necessary.  The  capital  stock  must  never 
be  reduced  below  the  indebtedness  of  the  company. 

Entries  to  Reduce  Capital  Stock. 

475.  The  entry  in  this  case  depends  altogether  on  the  cir- 
cumstances of  the  company  and  the  reason  for  reducing  the 
capital  stock.  If  the  capital  stock  of  the  company  is  fully  paid 
up,  and  the  Profit  and  Loss,  or  Surplus  Account,  or  Impair- 
ment Account,  shows  a  debit  balance,  the  capital  stock  may 
be  reduced  for  just  this  amount,  in  order  to  offset  this  balance 
and  put  the  company  on  a  solvent  basis ;  or  it  may  be  reduced 
for  a  greater  amount,  in  order  that  the  books  may  show  a 
surplus.    The  entry  in  this  case  would  be : 

Capital  Stock  $ 

^  To  Surplus  Account  $ 


Tor  the  amount  of  the  reduction  of  capital  as  per  resolu- 
tion, etc. 

476.  This  entry  reduces  the  Capital  Stock  Account  and 
credits  the  Surplus  Account  with  sufficient  to  wipe  out  the  in- 
solvency; or  with  sufficient  to  show  the  company  possessed 
of  a  surplus  after  the  Imp^airment  Account  has  been  closed 
out. 

477.  If  the  loss  of  capital  had  been  ascertained  before  the 


AND    CORPORATION   LAW  189 

books  were  closed  and  it  was  desired  not  to  have  an  **Impair- 
ment"  show  on  the  statement,  the  following  entry  could  be 
made: 

Capital  Stock  $ 

To  Profit  and  Loss  $ 

Capital  stock  reduced  to  cover  ascertained  loss  as  per  reso- 
lution of  stockholders  Minute  Book,  page. 

478.  If  the  books  were  properly  closed  a  debit  balance 
could  not  appear  in  either  Profit  and  Loss,  or  Surplus  Ac- 
count, but  would  be  carried  from  the  latter  to  an  Impairment 
Account,  in  which  case  the  entry  would  be : 

Capital  Stock  Dr.  $ 

To  Impairment  of  Capital  $ 

Capital  Stock  reduced  for  the  amount  for  which  it  was  im- 
paired, (or  to  cover  impairment  and  create  a  surplus)  as  per 

legal  resolution  of  the  stockholders,  page of  Minute 

Book. 

478  (a)  In  this  latter  case  the  credit  to  "Impairment" 
would  be  transferred  to  Surplus. 

479.  Again,  suppose  a  company  where  all  the  stock  has 
been  subscribed,  but  only  partially  paid  for,  the  Subscription 
Account  has  been  debited  for  the  full  subscription,  the  Cap- 
ital Stock  Account  has  been  credited  for  the  full  authorized 
capital;  and  the  Subscription  Account,  or  some  account,  or 
accounts,  representing  the  same,  shows  a  debit  balance  which 
is  carried  along  from  year  to  year  as  a  resource ;  then  further 
suppose  that  in  this  case  the  capital  stock  is  $100,000  fully 
subscribed,  $75,000  of  which  has  been  paid,  the  remaining 
$25,000  standing  on  the  Subscription  Account,  and  it  is  de- 
cided to  balance  this  account  by  reducing  the  Capital  Stock, 
the  proper  entry  would  be : 

Capital  Stock  Dr.  $25,000 

To  Subscription  $25,000 

For  reduction  in  the  Capital  Stock,  etc. 

480.  This  is  frequently  done  in  companies  where  it  is 
found  they  have  sufficient  capital  without  having  to  call  on 
the  stockholders  for  more;  and  they  do  not  desire  to  have 
this  nominal  asset,  with  its  corresponding  nominal  liability, 
standing  on  the  books. 


190  CORPORATION    ACCOUNTING 

481.  The  foregoing  entry  would  balance  the  Subscription 
Account,  and  make  the  Capital  Stock  Account  show  the  new 
capital  of  the  company ;  the  old  certificates  would  then  be  sur- 
rendered and  new  ones  issued  showing  the  new  capitalization.''' 
In  this  transaction,  and  in  the  preceding  one,  the  new  certifi- 
cates would  be  for  a  different  amount  of  shares  from  the  old 
ones,  for  the  reason  that  the  number  of  shares  of  each  stock- 
holder is"  reduced  in  the  same  proportion  as  the  number  of 
shares  of  capital  stock  is  reduced ;  but  in  the  last  example  they 
would  be  fully  paid  up  instead  ot  three-fourths  paid.  To  illus- 
trate, suppose  that  the  nominal  value  of  the  shares  was  $20 
each,  and  that  one  had  twenty  shares  on  which  he  had  paid 
three-fourths  of  the  face  value,  or  $15  per  share,  this  would 
amount  to  $300.  Now,  when  the  capital  stock  is*  reduced 
one-fourth,  his  number  of  shares  is  also  reduced  one-fourth, 
or  from  twenty  to  fifteen  shares,  but  these  fifteen  shares  fully 
paid  at  $20  per  share  are  also  equal  to  $300.  In  this  way, 
everybody  receives  paid  up  certificates  for  the  actual  amount 
they  have  paid,  and  the  books  show  the  capital  stock  fully 
paid-up. 

482.  Another  reason  for  reducing  the  Capital  Stock  is 
where  a  company  has  a  number  of  shares  of  unsold  or  so- 
called  Treasury  Stock,  and  it  desires  to  cancel  this  on  the 
books,  in  order  that  it  may  have  a  full  paid-up  capital.  In 
such  case  the  entry  to  make  is  this : 

Capital  Stock  Dr.  $ 

To  Treasury  Stock  $ 

For  the  amount  of  the  reduction  of  capital  stock,  etc. 

483.  When  the  old  stock  is  surrendered,  the  accounts'  are 
balanced  in  the  Stock  Ledger,  and  when  the  new  stock  is 
issued  they  are  reopened  for  the  new  number  of  shares. 

Dividends. 

484.  A  dividend  is  a  certain  amount  of  money  or  its 
equivalent,  set  aside  by  the  directors  out  of  the  profits  of  a 
company,  to  be  divided  among  the  stockholders  in  proportion 
to  the  shares  held  by  each. 

485.  Dividends  are  declared  either  at  a  certain  amount 
per  share,  or  at  a  certain  per  cent  on  the  outstanding  stock  of 
a  company.  It  is  not  necessary  that  the  stock  be  paid  for  in 
full  in  order  to  receive  dividends ;  but,  dividends  may  not  be 
declared  on  treasury  stock,  nor  unsubscribed  stock.     Divi- 

*Vide  paragraph  473. 


AND   CORPORATION   LAW  191 

dends  may  be  paid  only  out  of  the  actual  profits  of  a  com- 
pany. When  the  'Trofit  and  Loss"  account  shows  a  profit  of, 
say  $2000  at  the  closing  of  the  books,  either  one  of  the  follow- 
ing entries  may  be  made  to  dispose  of  this  profit : 

486.  First  Method: 

Profit  and  Loss  Dr.  $2000 

To  Surplus  Account  $1000 

To  Dividend  Account  $1000 

For  disposal  of  profits  as  per  resolution  of  the  Board  of 
Directors 190.  . .  Minute  Book,  page 

487.  Second  Method — First  Entry: 

Profit  and  Loss  Dr.  $2000 

To  Surplus  Account  $2000 

Net  profit  for  the  year  ending 190. .  .as 

shown  by  Profit  and  Loss  Account. 

488.  Second  Entry: 

Surplus  Account  Dr.  $1000 

To  Dividend  Account  $1000 

For  dividend  of %  as  per  resolution  of  the  Board  of 

Directors,  passed 190. . . 

Instalment  Dividend. 

489.  It  sometimes  happens  that  a  company  organized  on 
the  instalment  plan  of  paying  for  its  stock  is  so  prosperous 
that  it  is  really  not  in  need  of  the  instalment;  and  so  it  de- 
clares an  Instalment  Dividend;  that  is,  it  gives  as  a  dividend 
to  the  stockholders  the  instalment  that  is  due;  or  in  other 
words,  they  pass  an  instalment.  It  is  equivalent  to  their  pay- 
ing the  instalment  and  then  receiving  it  back  in  the  shape  of 
a  dividend.     The  entries'  are  made  as  follows : 

490.  First  Entry: 

Profit  and  Loss  (or  Surplus)        Dr.  $1000 

To  Dividend  Account  $1000 

For  dividend  of  i  per  cent  on  capital  stock  of  $100,000, 
payable  as  per  resolution  of  the  Board  of  Directors,  passed 
190. .  .Minute  Book,  page 


192  CORPORATION    ACCOUNTING 

491.  Second  Entry: 

Dividend  Account  Dr.  $1000 

To  Surplus  $1000 

(Here  enter  the  names  of  each  stockholder,  if  their  stock 
is  charged  to  them  in  the  General  Ledger  and  capital  stock 
credited  for  full  subscription.) 

492.  Or,  if  instalment  accounts  have  been  opened  for  the 
number  of  instalments  in  w^hich  payments  are  to  be  made  the 
second  entry  would  be : 

Dividend  Account  Dr.  $1000 

To  Instalment  Account  No $1000 

Instalment    No made    payable    by    dividend.      See 

Minute  Book,  page for  resolution  of  Board  of  Directors 

passed 190.  .  .authorizing  dividend. 

493.  Or  where  Capital  Stock  is  credited  and  a  Subscrip- 
tion Account  is  debited  for  the  full  subscription. 

Dividend  Account  •  Dr.  $1000 

To  Subscription  Account  $1000 

This  shows  an  additional  thousand  paid  on  Subscription. 

494.  Or,  debit  Dividend  Account  and  credit  Franchise 
Account,  or  Stockholders  Account,  where  either  of  these  ac- 
counts is  debited  for  the  unpaid  capital,  and  Capital  Stock 
credited  for  the  same  amount. 

495.  Where  Capital  Stock  is  credited  only  with  'Taid- 
up"  capital  make  the  following  entries : 

Profit  and  Loss  $1000 

To  Instalment  Dividend  $1000 

Instalment  Dividend  $1000 

To  Capital  Stock  $1000 

(with  full  explanation) 

496.  Where  an  instalment  dividend  is  paid  we  either 
issue  instalment  scrip  for  it,  or  endorse  the  payment  of  the 
instalment  on  the  certificates  of  stock  if  the  same  be  out- 
standing.* 

*Vide  paragraphs  250  and  251. 


AND   CORPORATION    L^.W  193 

Stock  Dividend. 

497.  Sometimes  the  assets  of  a  company  are  in  good 
shape  and  the  Surplus  Account  shows  a  large  credit,  but  there 
is  not  much  cash  on  hand  with  which  to  pay  a  dividend,  and 
the  company  having  some  stock  in  its  Treasury,  decides  to 
pay  a  ''Stock  Dividend" ;  that  is,  to  issue  a  certain  amount  of 
paid-up  stock  to  its  stockholders',  in  lieu  of  a  cash  dividend. 
The  entries  are  as  follows : 

498.  First  Entry: 

Surplus  Account  Dr.  $1000 

To  Dividend  Account  $1000 

For  dividend  declared 190.  . .,  as  per  Minute 

Book,  page 

499.  Second  Entry: 

Dividend  Account  Dr.  $1000 

To  Treasury  Stock  $1000 

For  amount  of  dividend  declared  payable  in  Treasury 
Stock. 

500.  These  entries  will  balance  the  Dividend  Account, 
reduce  the  Surplus  Account,  and  correspondingly  reduce  the 
amount  of  Treasury  Stock.  The  necessary  entries  are  then 
made  in  the  Stock  Ledger,  and  certificates'  issued  for  the  divi- 
dend. 

Bond  Dividend. 

501.  Sometimes  a  company  issues  to  its  stockholders  a 
100%  dividend  in  interest  bearing  bonds;  that  is,  a  com- 
pany with  $1,000,000  capital  issues  to  its  stockholders  $1,000,- 
000  4  per  cent  bonds.  The  Treasury  securities  of  the  com- 
pany are  pledged  to  redeem  them,  and  a  Redemption  Fund 
is  created  for  that  purpose.  The  bondholders  receive  interest 
on  the  bonds,  and  whatever  profits  the  company  makes  above 
the  interest  and  the  amount  set  aside  to  meet  the  bonds  at  the 
time  of  maturity  is  paid  in  dividends  to  the  stockholders.  The 
stockholders"  by  this  arrangement  are  bond  holders  as  well, 
and  this  places  them  in  a  peculiarly  advantageous  position. 
They  get  the  $1,000,000  in  bonds  as  a  dividend  without  pay- 
ing a  cent  for  them,  and  if  the  company's  securities  are  good, 
and  the  rate  of  interest  is  sufficient  inducement  to  investors, 
they  can  sell  the  bonds  for  $1,000,000  and  still  retain  their 


194  CORPORATION   ACCOUNTING 

stock  in  the  company.  This  would  be  simply  drawing  $i,ooo,- 
ooo  on  the  future,  or  drawing  out  an  amount  equal  to  their 
entire  Capital  Stock ;  or  they,,  or  any  of  them,  could  sell  their 
stock  in  the  company  and  still  have  $1,000,000  of  the  com- 
pany's bonds.  The  reader  can  see  what  a  sure  proposition 
this  is,  provided  they  have  sufficient  securities  to  float  the 
bonds.  The  Adams  Express  Co.  (unincorporated)  did  just 
this  very  thing  in  1898,  issuing  $12,000,000  4%  bonds  and 
pledging  $12,400,000  Treasury  Securities. 

Fictitious  or  Illegal  Dividends. 

502.  When  the  books  of  a  corporation  do  not  show  a  sur- 
plus over  all  liabilities  and  a  dividend  is  declared,  it  is  called 
a  Fictitious  Dividend,  for  the  reason  that  it  purports  to  show 
that  the  company  is  on  a  dividend  basis  when  in  reality  it  is 
not.  The  dividend  is'  paid  out  of  the  capital,  instead  of  being 
paid  out  of  profits ;  consequently  it  impairs  the  capital  and 
makes  for  the  ruin  of  the  company.  The  object  of  declaring 
such  a  dividend  is  to  create  the  impression  that  the  company 
is  in  a  prosperous  condition  and  thus  give  an  increased  mar- 
ket value  to  its  stock,  for  the  purpose  of  effecting  sales.  It  is, 
as  a  matter  of  fact,  a  criminal  business  and  deserving  of  the 
highest  penalty  the  law  prescribes  for  such  a  proceeding.  It 
is  in  keeping  with  the  practice  of  disreputable  brokers  and 
speculators  who  conduct  ''wash  sales"  for  the  purpose  of 
booming  weak  or  inactive  stocks. 

Declaring  a  Dividend. 

503.  Declaring  a  dividend  is  the  mere  formal  declaration 
of  the  Board  of  Directors  fixing  the  amount  to  be  divided  and 
the  date  of  payment,  and  also  fixing  the  date  on  which  the 
transfer  book  is  closed,  if  the  same  is  not  provided  for  in  the 
by-laws. 

Paying  Dividends. 

504.  Dividends  are  not  paid  for  some  time  after  they  are 
declared.  One  reason  is,  to  allow  the  secretary  to  prepare  a 
list  of  stockholders  and  the  amount  each  one  is  entitled  to. 
A  certain  number  of  days  before  it  is  paid  the  books  are  closed 
against  transfers,  and  it  is  to  the  parties  whose  names  appear 
on  the  books  as  stockholders  at  this  time,  that  the  dividends 
are  paid. 

(See  chapter  on  Stock  Exchanges  for  exception  to  this 
rule.) 


AND   CORPORATION   LAW  195 

Following  is  a  simple  form  of  Dividend  Receipt  Book. 
505.  Dividend  Receipt  Book. 


Dividend   Number of per   cent.      Declared 

,  I . . .  Payable i . . . 


Check 
No. 


No.  of 
Shares 


Amount 


Date  of 
Paymen 


Signatures 
or  Remarks 


506.  A  dividend  receipt  book  is  not  necessary  where  a 
dividend  check  is  used,  but  it  is  a  convenient  reference  record 
to  have  on  hand,  giving  in  detail  everything  pertaining  to  the 
declaration  and  payment  of  every  dividend. 


PART  IL 


PRACTICAL  ACCOUNTING,    OPENING  AN1> 
CLOSING  OF  CORPORATION  BOOKS, 
PARTNERSHIP  CONVERSIONS,  CON- 
SOLIDATION    OF     CORPORATIONS, 
BANK  ORGANIZATION,  Etc. 


CHAPTER  IX. 

General,  Commercial  and  Financial  Books  of  a  Corporation 
— Forms  and  Uses  of  Cash  Books,  Journals,  Ledgers,  etc. — 
Antiquated  vs.  Modern  Methods — Labor  Saving  Devices — 
Direct  Road  to  Results — Absolute  Proof  of  Posting — Use  and 
Abuse  of  Columnar  Books — Simple  System  of  Department 
Accounting — Daily  Statement  of  Liabilities. 


508.  The  general  books  of  a  corporation  are  the  same  as 
the  general  books  of  a  firm  or  partnership.  The  auxiliary 
books  differ  according  to  the  nature  of  the  business ;  but  there 
are  modern  and  ancient  books  in  accounting  same  as  in  liter- 
ature, and  there  are  modern  and  ancient  methods  of  keeping 
them  too.  Direct  posting  and  the  use  of  columnar  Cash  Books 
and  Journals'  were  unknown  some  years  ago,  now  they  are 
known  to  every  modern  book-keeper.  Formerly  everything 
was  journalized — even  the  cash — now,  only  a  moss-back 
would  journaHze  his  cash;  and  the  up-to-date  bookkeeper 
makes  all  his  postings  from  books  of  original  entry,  whether 
they  be  Sales  Books,  Blotters,  Invoice  Books,  Journals  or 
Cash  Books.  The  object  is  to  economize  time  in  his"  work  and 
space  in  his  books,  and  to  avoid  the  wholly  unnecessary  trou- 
ble of  writing  and  explaining  things  twice.  In  some  of  the 
very  large  houses  where  a  great  many  checks  are  drawn,  they 
post  direct  from  the  check  book ;  and  in  others  where  the  num- 
ber of  bills  Receivable  and  Bills  Payable  is  many,  these  ac- 
counts' are  taken  out  of  the  Ledger  altogether  and  kept  in  the 
Bill  Books ;  just  the  same  as  the  cash  is  kept  in  the  Cash  Book. 
Goodwin's  Bill  Book  is  arranged  for  this  purpose,  and  it  is  the 
best  Bill  Book  obtainable  ;*  then  there  is  the  modern  voucher 
method  of  payment,  another  economizer.  In  this  way  the 
Journal  is  but  little  used,  comparatively,  and  the  explanation 
column  in  the  Ledger  is  narrow  and  but  seldom  used.  The 
Ledger  gives  the  folio  of  the  book  from  which  the  posting  is 
made,  and  if  any  explanation  of  the  entry  is  required  it  is  only 
necessary  to  turn  to  the  page  of  the  book  of  original  entry  to 
find  the  full  and  complete  particulars.  Besides  saving  time, 
this  method  also  renders  the  bookkeeper  less  liable  to  make 

*See  Goodwin's  Improved  Bookkeeping  and  Business  Manual,  pages 
^94  and  295. 


AND   CORPORATION   LAW 


199? 


mistakes",  and  makes  the  work  of  locating  and  correcting  er- 
rors but  half  as  laborious,  since  he  has  but  half  as  much  work 
to  go  over.  For  example,  under  the  old  way  he  would  make 
his  first  entry  in  the  Sales  Book,  then  he  would  Journalize  it,. 
and  then  post  it  to  the  Ledger,  and  perhaps  make  another  ex- 
planation of  it.  The  reader  can  see  what  a  waste  of  time  this 
is,  and  that  nothing  is  really  gained  by  it.  Again  if  he  sold  a 
bill  of  merchandise  for  cash,  the  "old  school"  bookkeeper 
would  make  an  entry  like  this  in  his  Journal : 


Cash 

To  Merchandise 


Dr.  $. 


$, 


And  he  would  debit  cash  and  credit  merchandise,  and  tell  you? 
"this  is  the  only  way  to  make  a  double  entry,"  or  he  would 
make  two  entries  like  the  following: 


John  Jones 

To  Merchandise 


Dr.  $, 


$. 


Debiting  Jones  and  crediting  merchandise,  and  then  a  second: 
entry : 

Cash  Dr.  $ 

To  John  Jones  $ 

Debiting  cash  and  crediting  John  Jones. 

The  modern  bookkeeper  would  make  the  following  entry  in 
his'  Cash  book  for  a  cash  sale : 


509. 


CASH  BOOK. 


Dr. 


Date 
1905 

0 

Names 

Particulars 

Miscel- 
laneous 
Credits 

Merch- 
andise 
Credits 

Totals 

Oct. 

1 

f 

Mdse, 

Sold  J.Jones  for  cash 

100 

00 

510.  Merchandise  column  is  headed  "Merchandise  Credit" 
for  the  reason  that  the  amounts  in  this  column  are  credited 
to  Merchandise  Account,  but  the  items  are  not  credited  sep- 
arately ;  instead,  they  are  carried  along  in  this  column  till  the 
end  of  the  month,  when  merchandise  is  credited  in  one  entry 
for  the  total  cash  sales.  This  saves  perhaps*  hundreds  of  en- 
tries and  keeps  the  Merchandise  Account  in  the  Ledger  from 


200 


CORPORATION    ACCOUNTING 


occupying  half  the  Ledger;  and  what  is  true  of  this  column 
is  true  of  all  extra  columns  in  the  Cash  Book  and  Journal. 
These  books  may  contain  as  many  columns  on  debit  and  credit 
sides'  respectively  as  there  are  accounts  of  revenue,  and  ac- 
counts of  expense;  or  they  may  contain  extra  columns  for 
every  department  of  a  business ;  or  they  may  contain  a  column 
for  each  Ledger  where  more  than  one  Ledger  is  used.  Their 
use  is  of  course  limited,  but  as  many  as  ten  on  a  side  may  be 
used  without  experiencing  the  least  confusion.  Where  there 
are  many  extra  columns  in  a  Journal  the  debits'  can  be  put  on 
the  left  hand  page  and  the  credits  on  the  right,  instead  of  all 
on  one  page.  In  this  way  thousands  of  postings  are  saved 
every  month  in  a  moderately  large  business ;  and  if  it  becomes 
necessary  to  check  one's  postings,  in  order  to  locate  some  er- 
ror in  the  Trial  Balance,  the  saving  of  physical  and  mental 
exertion  becomes  obvious  even  to  the  very  blind. 

Abusing  Extra  Columns. 

511.  It  must  be  admitted  that  the  extra  columns  can  be 
abused,  same  as  any  other  good  things  and  where  there  are  a 
great  number  of  departments  in  a  business  it  would  be  absurd 
to  have  a  column  for  each  department  in  a  Cash  Book  or  Jour- 
nal. In  such  cases  ''Department  Sales  Registers"  and  "De- 
partment Expense  Registers"  are  used  for  classification  and 
distribution  of  department  credits  and  expenses.  In  the  case 
of  sales,  every  department  would  receive  credit  from  the  Sales 
Register,  and  the  payments  would  be  entered  in  the  Cash 
Book  under  proper  ledger  headings.  In  some  of  the  highly 
systematized  department  houses,  the  Cash  Book  has  been 
abolished  altogether,  also  the  Journal,  and  a  system  of  cash 
and  transfer  vouchers  substituted. 


512.     DR. 


JOURNAL. 


CR. 


Total 


Mdse. 
Debits 


Miscel  - 
Debits 


Particulars 


Miscel- 
Credits 


Mdse. 
Credits 


Total 


513.  The  old  style  of  Journal  has  gone  out  of  date,  with 
its  debit  and  credit  columns  on  the  same  side.  The  modern 
style  of  Journal,  here  illustrated,  has  debit  columns  on  the  left 
side  of  the  page,  and  credit  columns  on  the  right  side,  or  it 


AND   CORPORATION   LAW 


201 


may  be  a  "Folio  Journal"  with  debits  on  one  page  and  credits 
on  the  other  page. 

This  form  not  only  admits  of  carrying  extra  columns  on 
each  side,  but  it  is  economy  in  book  space,  as  a  complete  entry 
can  be  made  on  one  line  instead  of  two;  and  it  lessens  the 
■danger  of  posting  to  the  wrong  side  of  an  account^  since  all 
items  on  the  left  or  debit  side  are  posted  to  the  debit  side  of 
accounts  in  the  Ledger,  and  all  on  the  credit  side  to  the  credit 
side  of  accounts  in  the  Ledger.  The  extra  columns  are  of 
course  posted  only  once  a  month. 

514.  There  are  many  forms  of  Ledger  rulings  such  as  re- 
verse, double  reverse,  horizontal  and  balance  ledgers.  Space 
will  not  permit  a  description  of  all  of  them,  and  only  two,  the 
Balance  Ledger  and  Horizontal  Ledger,  will  be  described.* 


515. 


Balance  Ledger. 
JOHN  SMITH  JOHN  JONES 


Date 
1905 

Explanation 

0 

0 
fa 

Debit 

Cred. 

Bal. 

Date 
1905 

Explanation 

0 

Debit 

Cred. 

Bal. 

Oct 

Nv 

1 
10 

Jl 
05 

10 

00 

5 

00 

10 
5 

00 
00 

Oct 

Nv 

1 

Note  No.  7 

Jl 

100 

00 

100 

00 

516.  This  is  the  most  economical  of  all  ledgers.  Two  ac- 
counts are  kept  on  a  page  and  there  is  only  one  date  column 
for  both  debit  and  credit  sides ;  this  makes  the  debit  and  credit 
entries  follow  each  other,  and  in  this  way  every  inch  of  space 
is  used.  Where  the  balance  column  is  used  to  show  the  bal- 
ance at  every  entry,  considerable  time  is  lost  in  posting,  but, 
the  admirers  of  this  style  of  ledger  claim  that  the  time  saved 
in  taking  oil  the  Trial  Balance  more  than  makes  up  for  the 
time  lost  in  posting;  besides  the  proprietor  or  manager  can 
see  the  standing  of  any  account  at  a  glance,  without  having 
to  wait  to  figure  it  up. 

Horizontal  Ledger. 

517.  This  is  a  development  of  what  is  known  as  the  Bos- 
ton Bank  Ledger.  The  account  headings  or  names  of  accounts 
are  written  down  the  left  hand  margin  of  the  page,  and  the 
accounts  extended  horizontally  opposite  the  names  in  the 
space  alotted  to  them.  One  line,  or  one  page,  may  be  allotted 
to  an  account,  according  to  its  activity. 


'See  Goodwin  for  varied  ledger  rulings. 


202 


CORPORATION   ACCOUNTING 


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AND   CORPORATION  LAW  203 

519.  The  illustration  opposite  shows  the  manner  in  which 
the  accounts  are  kept  in  a  horizontal  ledger.  The  balances  are 
always  extended  on  the  same  line  as  the  names,  and  show  how 
the  balances  vary  from  month  to  month.  The  mathematical 
accuracy  of  each  page  is  proved  by  adding  the  total  of  the 
debit  column  to  the  total  of  the  balance  column  for  the  pre- 
vious month,  and  then  subtracting  the  total  of  the  credit 
column.  If  the  remainder  agrees  with  the  total  of  the  bal- 
ance column  for  the  current  month,  it  proves  that  the  exten- 
sions are  correct,  and  there  is  no  need  to  go  over  this  part  of 
the  work  to  locate  an  error  in  the  Trial  Balance.  The  abso- 
lute accuracy  of  the  postings  are  as  easily  proved  by  the  use 
of  a  proof  book,  and  in  this  way  errors  are  localized.  Of 
course  it  is  necessary  to  transfer  this  ledger  every  year,  and 
this  would  make  it  objectionable  to  the  devotees  of  the  loose 
leaf  ledger,  but  there  is  no  system  against  which  objections 
can  not  be  raised  and  the  question  to  decide  is,  which  system 
offers  the  greatest  advantage  with  the  least  expenditure  of 
time  and  worry? 

520.  Speaking  of  accuracy  in  posting,  the  only  way  to  in- 
sure against  posting  to  wrong  accounts  is  by  use  of  the  "Proof 
by  Balance  System  of  posting." 

Department  Store  Accounting. 

521.  On  account  of  the  great  number  who  are  interested 
in  department  accounting  the  author  has  thought  it  well  to 
digress  somewhat  further  from  his  subject  to  give  a  simple 
method  of  Department  Accounting,  and  as  purchases  must  al- 
ways precede  sales,  the  Purchase  Department  will  be  taken 
up  first.  Inasmuch  as  Department  Accounting  would  form 
the  subject  of  quite  a  volume  in  itself,  it  is  necessary  to  pass 
over  many  of  the  details,  including  the  order  System  and  Re- 
ceiving Department  and  to  start  in  with  the  accounting  for 
purchases. 

Invoice  Record. 

522.  An  invoice  having  been  checked  up,  as  to  quantities, 
quality,  extensions,  footings  and  freight,  and  segregation  hav- 
ing been  made  of  the  items  for  each  department  (if  the  invoice 
covers  more  than  one  class  of  goods)  it  is  handed  into  the  of- 
fice and  here  it  is  entered  on  the  "Voucher  Record"  or  "Invoice 
Journal."  Now,  unless  the  Voucher  Record  is  properly  kept 
and  bills  are  promptly  paid,  the  voucher  system  will  be  found 
more  of  a  nuisance  than  a  service,  but  if  properly  kept,  and 


204  CORPORATION    ACCOUNTING 

bills  are  discounted  or  promptly  paid,  it  will  be  found  a  source 
of  great  convenience  and  a  labor  saver  as  well.  There  are 
some  houses  that  discount  most  all  their  bills,  but  have  a  few 
chief  creditors  with  which  they  wish  to  keep  open  accounts. 
For  this  class  a  special  form  of  Voucher  Record  has  been  de- 
signed and  is  herewith  presented.   See  form  on  opposite  page. 

523.  The  names  of  all  creditors  are  entered  in  the  column 
headed  "In  favor  of."  If  goods  are  purchased  on  time,  and 
the  amounts  are  to  be  credited  to  open  accounts,  the  amount 
of  the  invoice  is  placed  in  the  ''Oipen  Acocunts  Payable" 
column,  and  the  distribution  made  in  the  proper  department 
columns.  If  the  goods  are  to  be  paid  for  promptly  the  amount 
of  invoice  is  entered  in  the  ''Audited  Vouchers  Payable" 
column,  and  the  proper  extensions  made  in  the  department 
columns.  The  total  of  ''Open  Accounts"  is  posted  at  the  end 
of  the  month  to  a  "Controlling  Account"*  under  that  heading 
in  the  General  Ledger,  and  the  total  of  "Audited  Vouchers" 
is  posted  also  to  a  "Controlling  Account"  in  the  General 
Ledger.  When  a  freight  bill  is  paid  it  is  entered  in  the 
"Freight  Column"  and  distribution  made  in  the  department 
columns,  and  at  the  end  of  the  month  the  total  of  this  column 
is  posted  to  the  credit  of  Freight  Account,  and  offsets  and  bal- 
ances the  total  of  the  "freight"  column  posted  from  the  Cash 
Book  to  the  debit  of  Freight  Account — this  adds  the  freight 
to  the  cost  of  the  goods.*^  The  totals  of  all  department  col- 
umns are  posted  to  department  merchandise  accounts  in  the 
General  Ledger,  and  as  the  totals  of  all  department  columns 
must  equal  the  totals  of  the  "Open  Accounts,"  ''Audited 
Vouchers"  and  "Freight"  columns,  the  General  Ledger  will 
be  in  balance. 

524.  When  an  open  account  is  paid  it  is  entered  in  the 
column  adjoining  "Terms,"  and  the  difference  between  this 
and  the  first  column  shows  the  amount  owing  on  open  ac- 
counts— assuming  all  invoices  to  be  entered.  When  a  voucher 
payment  is  made  the  amount  is  entered  in  the  extreme  left 
column,  and  the  difference  between  this  and  the  "Audited 
Vouchers  column  shows  the  amount  due  on  Audited  Vouch- 
ers. In  this  way  the  proprietor  can  tell  his  liability  for  mer- 
chandise at  any  time  from  this'  single  record. 

Expense  Voucher  Record. 

527.     The  Expense  Voucher  Record  is  kept  in  the  same 

*Vide  paragraph  423. 
*2Vide  paragraph  419. 


AND   CORPORATION   LAW 


205 


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206  CORPOKATION   ACCOUNTING 

way  as  the  Invoice  Record.  The  difference  between  the  first 
two  columns  on  the  left,  and  the  extreme  right  column  being 
the  balance  due.  The  first  three  distributive  columns  are  for 
items  that  do  not  belong  to  any  one  department — the  third 
column  being  for  items  that  become  a  Permanent  Asset.* 

527.  If  desired  the  "Freight"  column  could  be  kept  in 
this  record  instead  of  in  the  Invoice  Record,  but  inasmuch  as 
freight  is  a  part  of  the  cost  of  buying,  and  not  a  part  of  the 
cost  of  selling,  it  is  logically  correct  to  keep  it  in  the  "Invoice 
or  Purchase  Record,"  and  to  post  it  to  Merchandise  instead  of 
to  Expense.  The  "Fixtures  and  Furniture"  column  might  be 
put  in  the  Invoice  Record,  but  then  the  balance  of  that  record 
would  not  show  merchandise  liability,  and  if  we  enter  this 
class  of  invoice  in  the  General  Journal,  it  would  necessitate 
an  "Accounts  Payable"  column  in  the  General  Journal,  so  we 
compromise  the  matter  by  putting  it  in  the  Expense  Voucher 
Record. 

Sales  Register. 

529.  We  will  now  commence  to  record  sales  made.  Every 
sales  person  is  furnished  with  a  book  of  sales  tags',  or  perhaps 
with  two  books  of  different  colors,  one  for  cash  sales  and  one 
for  credit  sales.  These  books  are  so  well  known  and  under- 
stood that  a  description  is*  not  considered  necessary.  With 
every  sale,  one  of  these  slips  or  tags  goes  to  the  office.  The 
cash  and  credit  sales  tags  are  kept  separate  and  they  are  as- 
sorted by  departments,  and  also  by  "sales  persons."  At  the 
close  of  each  day's  business,  the  sales  of  each  person  are  to- 
talled on  an  adding  machine,  compared  with  the  recapitulation 
sheets  in  their  sales  books,  as  to  numbers  and  amounts,  and 
then  entered  on  a  "Daily  Abstract  of  Sales"  sheet. 

530.  This  Abstract  Sheet  is  one  the  loose  leaf  plan,  and 
there  can  be  as  many  lines  as  there  are  sales  people  in  the 
highest  employing  department.  The  sales  are  all  collected 
here  by  departments;  the  returns,  as  shown  by  the  returns 
book,  deducted  and  the  "Net  Sales"  recapitulated  on  the 
right  hand  margin.  Charge  sales  are  either  charged  to  cus- 
tomers direct  from  the  tags,  or  charged  once  a  month  by 
means  of  one  of  the  many  carbon  billing  systems'. 

531.  Next  we  have  a  monthly  record  of  cash  and  credit 
sales  with  31  lines  on  it — one  for  every  day  in  the  longest 
month.     The  word  "Sunday"  or  "Holiday"  is  written  oppo- 

*Vide  paragraph  443. 


AND   CORPORATION   LAW 


207 


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208 


CORPORATION    ACCOUNTING 


site  the  dates  on  which  they  fall.  This  is  made  up  from  the 
recapitulation  on  the  right  hand  margin  of  the  "Daily  Ab- 
stract of  Sales/'  and  the  recapitulation  on  the  right  hand  mar- 
gin of  this  record,  shows  at  a  glance  the  total  of  every  depart- 
ment for  every  day,  and  also  for  the  month ;  both  as'  to  cash 
and  credit  and  total  sales,  and  will  be  found  very  valuable  for 
statistical  and  comparative  purposes.  The  total  sales  of  each 
department  are  posted  at  the  end  of  the  month,  the  folios  be- 
ing written  on  the  line  opposite  "posting"  and  under  each  de- 
partment heading;  this  reduces  the  posting  to  the  extreme 
minimum — one  posting  a  month  to  the  credit  of  each  depart- 
ment— in  the  same  way  that  the  "Invoice  Voucher  Record" 
makes  necessary  only  one  posting  a  month  to  the  debit  of  each 
department. 


534. 


CASH  RETURNS  BOOK. 


Date 


Credit  Cash  returned 
as  follows 


No. 


CB. 
Page 


Refund 


Exchange  Department. 

535.  When  goods  are  returned  by  a  customer,  they  are 
taken  either  to  a  department  manager,  or  an  exchange  depart- 
ment. If  the  purchase  tag  accompanies  the  goods  and  they 
are  identified  and  exchangeable,  a  credit  voucher  is  issued  to 
the  customer.  This  voucher  should  be  in  triplicate,  one  given 
to  the  customer,  one  sent  to  the  office,  and  one  retained  in  the 
exchange  department.  All  are  of  course  numbered,  and  the 
office  cannot  take  nor  give  credit  for  more  vouchers  than  the 
Exchange  Department  records  call  for.  If  the  sale  was  a  cash 
sale,  and  the  return  calls  for  a  cash  refund,  the  customer  takes 
the  voucher  to  the  office  and  gets  the  cash  for  it.  The  Cashier 
enters  this  in  the  "Cash  Refund  Book"  placing  the  amount  in 
the  Refund  column,  giving  the  name  of  the  person  and  num- 
ber of  the  refund;  then  the  amount  is  distributed  under  the 
proper  department  headings.  The  total  of  the  refund  column 
in  this  book  must  agree  with  the  total  of  all  the  other  columns. 
These  columns  are  footed  up  every  night  and  deducted  on  the 
"Daily  Abstract  of  Sales"  sheet,  the  net  cash  sales  being  en- 
tered in  the  first  column  of  the  Cash  Book,  the  total  of  which 
at  the  end  of  the  month  will  correspond  with  the  total  of  the 
same  column  in  the  monhly  sales  register.     To  prevent  fraud 


AND    CORPORATION    LAW 


209 


in  the  matter  of  refunds,  all  refund  vouchers  issued  by  the  Ex- 
change Department  should  be  O.  K.'d  by  the  department  man- 
ager to  whose  department  the  goods  are  returned  and  also  by 
the  clerk  who  puts  the  goods  back  into  stock. 


536. 


CREDIT  RETURN  BOOK. 


Date 


Credit  the 
following:  persons 


No. 


Ledg 
&F0I. 


Amount 


537.  When  goods  are  returned  by  a  customer  who  has  an 
open  account,  they  are  entered  in  the  ''Credit  Returns  Book" 
in  the  same  manner  in  which  the  entries  are  made  in  the  "Cash 
Returns  Book"  and  the  totals  of  the  department  columns'  are 
deducted  daily  from  the  department  columns  on  the  "Daily 
Abstract  of  Sales."  The  customers  may  be  credited  in  one  of 
several  ways ;  (a)  direct  from  this  book,  giving  the  ledger  and 
folio  of  their  accounts  as' — "A — K"  100;  (b)  direct  from  the 
voucher  slip ;  (c)  entered  on  the  billing  book  in  a  credit  col- 
umn, deducted  from  the  bill  and  the  net  amount  charged  at 
the  end  of  the  month.  Where  there  is  more  than  one  "Sales 
Ledger,"  and  there  is  a  controlling  account  for  each  Ledger, 
we  would  have  to  put  in  a  ledger  column  for  each  Ledger,  or 
to  segregate  the  amounts  for  each  Ledger  and  debit  the  con- 
trolling accounts  for  proper  amounts  at  the  end  of  the  month ; 
or  if  we  had  a  billing  system  for  each  Ledger  we  could  follow 
the  method  suggested  in  (c). 

538.  The  keeping  of  the  cash  book  is  very  simple.  All 
cash  sales  are  entered  in  the  first  column.  All  payments  re- 
ceived on  open  accounts  are  entered  in  the  proper  ledger  col- 
umn, and  any  money  received  for  credit  of  an  account  in  the 
"General  Ledger"  is  entered  in  the  general  ledger  column. 
The  totals  of  the  "Sales  Ledger"  columns  are  posted  at  the 
end  of  the  month  to  proper  controlling  accounts. — See  defini- 
tion of  Controlling  Account,  paragraph  423. 

539.  The  total  of  "Voucher  Payable"  column  is  posted  at 
the  end  of  the  month  to  the  Voucher  Payable  Account,  and 
the  balance  of  this  acocunt  is  the  amount  due  on  Audited 
Vouchers.  The  total  of  the  "Accounts  Payable"  column  is 
posted  to  "Open  Accounts  Payable"  account  at  the  end  of 


210 


CORPORATION    ACCOUNTING 


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the  month,  and  the  balance  of  this 
account  is  the  amount  due  on  open 
accounts — the  sum  of  these  two  is 
the  total  of  trade  liabilities.  The  re- 
maining columns  in  the  Cash  Book 
suggest  their  purpose.  In  addition 
to  the  foregoing  books  we  would 
have  a  Petty  Cash  Cook  for  petty 
disbursements,  a  Transfer  Journal 
for  transfers  of  debits  or  credits 
made  to  wrong  departments  or  to 
wrong  ledgers,  besides  other  aux- 
iliary books',  such  as  ''Mail  Order 
Record,"  ''C.  O.  D.  Sales  Record," 
etc.  The  General  Ledger  would 
contain  all  the  Real,  Nominal,  Con- 
trolling and  Representative  ac- 
counts. It  would  have  its  accom- 
panying Journal  and  the  accounting 
of  the  entire  business  would  con- 
verge toward  it  and  rest  in  it.  It 
would  be  the  heart  and  nerve  center 
of  the  entire  business.  It  would 
throb  and  vibrate  in  unison  with 
every  department,  and  the  weal  and 
woe  of  every  department  would  be 
reflected  in  its  pages  and  the  mer- 
chant who  studied  it  carefully  and 
watched  its  pulsations,  would  be  in 
close  and  constant  touch  with  his 
business. 

541.  The  form  on  the  opposite 
page  is  an  illustration  of  a  Petty 
Ledger  designed  by  the  writer 
about  eight  years  ago  for  a  business 
that  had  a  great  many  petty  ac- 
counts. Since  that  time  it  has  been 
used  by  a  number  of  bookkeepers 
with  much  satisfaction. 


AND   CORPORATION   LAW 


211 


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212  CORPORATION   ACCOUNTING 

543.  The  object  of  this  design  of  Petty  Ledger  is 
to  minimize  the  time  required  to  take  a  Trial  Balance 
from  petty  accounts  and  reduce  a  page  or  section  of  a 
petty  ledger  to  the  simplicity  of  a  single  account.  The 
distinguishing  feature  of  this  method  from  anything  now 
in  use,  is  the  system  of  numbering  each  entry  on  a  page  and 
making  all  the  credits  by  number,  thereby  affording  a  com- 
plete check  on  every  entry;  thus,  instead  of  crediting  each 
debtor  opposite  his  name,  and  having  a  straggling  credit  col- 
umn, with  blanks  and  credits  alternating,  the  first  credit  is 
placed  at  the  top  of  the  column  regardless  of  what  account 
it  pays,  and  is  preceded  by  the  number  of  the  account  it  liqui- 
dates. When  the  credit  is  made  a  check  mark  is  placed 
in  the  "paid"  or  checking  column,  indicating  that  that  item  is 
paid.  A  glance  down  this  column  shows  at  any  time  the  paid 
and  unpaid  accounts,  and  the  numbers  checked  should  corre- 
spond with  the  numbers  entered  in  the  credit  column.  Pro- 
vision is  also  made  for  partial  payments.  It  will  be  noted 
that  there  are  two  lines  on  the  credit  side  for  every  line  on  the 
debt  side,  these  we  call  primary  and  secondary  lines',  the 
through  or  blue  lines  are  primary  lines,'^  on  which  all  full  pay- 
ments or  balances  are  entered.  The  short  (red)  or  secondary 
lines  are  for  partial  payments.  When  a  partial  payment  is 
made  we  first  enter  the  number  of  the  item  on  which  the  pay- 
ment is  made  on  the  first  red  line  below  the  last  credit  entry, 
and  place  a  "P"  indicating  partial  in  the  column  headed  *Tar- 
tial  or  Balance,"  and  the  amount  in  the  money  column;  then 
we  place  the  balance  due  in  the  balance  column  on  the  debt 
side.  We  do  not  check  this*  in  the  "Paid"  column  yet,  as  it 
would  show  a  false  statement.  As  the  "Paid"  column  shows 
the  accounts  paid  in  full,  so  the  "Balance"  column  shows  the 
balances  due  on  the  partially  paid  accounts. 

When  the  balance  is  paid  on  any  account  we  enter  the 
number  on  a  blue  line  followed  by  a  "B,"  indicating  balance, 
and  then  we  check  the  account  in  the  "Paid"  column  to  show 
that  the  item  is  settled.  Bear  in  mind  that  we  find  out  the 
accounts  paid  and  unpaid  by  glancing  down  the  "Paid"  col- 
umn and  the  balances  due  on  partially  paid  accounts  by  glanc- 
ing down  the  *'Balance"column.  So  much  for  the  utility,  now 
for  the  labor-saving  features.  You  will  observe  that  at  the 
end  of  any  month,  after  the  first  month,  it  is  only  necessary 
to  add  to  the  pencil  footings  of  the  previous  month,  on  debt 

*Inasmucli  as  the  colors  can  not  be  reproduced  here  it  is  necessary  to- 
say  that  the  blue  lines  run  clear  across  the  page  and  the  red  lines  are 
represented  by  the  short  lines  on  the  credit  side. 


AND   CORPORATION   LAW 


213. 


544.      DAILY  STATEMENT  OF  LIABILITY. 


1905 
Oct. 
Nov. 

31 

Due  on  open  accounts  and  vouchers 
Purchases  received  today 

Paid  by  Cash 
Paid  by  Note 

$10,000 
1,000 

00 
00 

$11,000 
5,000 

oa- 

00 

Nov. 

3,000 
2,000 

(( 

Balance  due  on  open  accounts 

6,000 

oo 

Oct. 
Nov. 

31 

Due  on  Bills  Payable 
New  notes  g-iven 

Notes  paid  off 

5,000 
2,000 

00 
00 

7,000 
1,000 

00 
00 

(( 

Balance  due  on  Bills  Payable 

6,000 

00 

Oct. 

Nov. 

31 

Contra 

Accounts  Receivable 
Credit  Sales  for  today 

Payments  received  on  open  accounts 

Balance  Accounts  Receivable 

15,000 
1,000 

00 
00 

16,000 
3,000 

00 
00 

(( 

(( 

13,000 

00 

Oct. 

Nov. 

31 

Bills  Receivable 
New  notes  received 

Notes  paid 

2,000 
0,000 

00 
00 

2,000 
500 

00 
00 

(( 

(( ' 

Balance  Bills  Receivable 

1,500 

00 

Oct. 
Nov. 

31 

Cash  on  hand 
Cash  received 

Cash  paid  out 

3,000 
1,500 

00 
00 

4,500 
4,000 

00 
00 

(( 

Balance  on  hand 

Summary 

500 

00 

Cash  on  hand 
Accounts  Receivable 
Bills  Receivable 

Total  Current  Assets 

exclusive  of  Mdse. 

500 

13,000 

1,500 

00 
00 
00 

15,000 

00 

Due  on  Open  Accounts 
"     "     Bills  Payable 

6,000 
6,000 

00 
00 

Total  trade  liabilities 

12,000 

00 

Balance 

$3,000 

oa 

214  CORPORATION    ACCOUNTING 

and  credit  sides  respecively,  and  the  difference  between  the 
two  sides  is  extended  into  the  ''Monthly  Balance"  column,  as 
the  balance  of  that  section  of  the  work  for  the  month,  from 
whence  it  can  be  transferred  to  the  Trial  Balance  Book  same 
as  any  ordinary  ledger  account.  This  is  a  very  simple  opera- 
tion and  saves  a  great  deal  of  time,  besides  reducing  the  possi- 
bility of  making  mistakes  to  a  minimum,  and  making  the  de- 
tection of  mistakes  easy  by  the  use  of  the  numbers.  There 
is  no  segregating  of  unpaid  accounts,  no  going  back  over  the 
credit  side  month  after  month  to  locate  or  include  some  item 
sandwiched  in  somewhere,  and  no  risk  of  taking  a  partial  pay- 
ment for  a  settlement — in  fine  it  is  a  neat,  simple,  practical 
and  common-sense  method  of  keeping  "Petty  Accounts." 

Daily  Statement  of  Liability. 

545.  The  method  illustrated  on  the  preceding  page  may 
be  employed  by  any  firm  or  company  to  learn  its  daily  liability 
to  creditors,  and  also  what  there  is  available  to  meet  it : 

546.  The  balance  shows  a  margin  of  $3000  for  bad  debts, 
reserves,  etc.,  and  the  fixed  assets  and  merchandise  remain  to 
offset  Capital  Liabilities.  A  printed  statement  like  the  forego- 
ing can  be  filled  in  in  a  very  short  time  every  day,  and  will 
more  than  repay  for  the  labor.  This  form  is  more  suggestive 
than  pretentious.  It  can  be  further  detailed  to  include  either 
the  approximate  inventory  or  the  actual  inventory  of  merchan- 
dise on  hand,  where  a  cost  system  is"  in  use.  In  fact  it  is  very 
important  to  the  merchant  to  know  at  all  times  the  amount  of 
stock  he  is  carrying  and  by  the  addition  of  the  Capital  Assets 
and  Liabilities  and  a  reserve  for  depreciation,  etc.,  he  can  have 
a  going  Balance  Sheet  and  Profit  and  Loss  Statement. 


CHAPTER  X. 

Illustrating  a  Set  of  Books  for  a  Gold  Mining  Company — 
A  Symposium  on  Capital  Stock  Account — Paying  for  Stock 
on  the  Instalment  Plan — Treasury  Stock  as  a  Negative — 
Opening  and  Closing  the  Books — The  First  Annual  Statement. 


547.  The  Books  for  the  mining  company  incorporated  in 
Chapter  VI  of  this  book  will  now  be  opened  and  the  style  of 
account  books  illustrated  in  the  beginning  of  Chapter  IX  will 
be  used,*  but  before  commencing,  a  few  general  remarks  on 
the  opening  of  the  books  may  not  be  out  of  order. 

548.  Some  accountants'  aver  that  the  Capital  Stock  Ac- 
count in  the  General  Ledger  should  be  credited  with  only  the 
paid-up  capital  of  the  company;  others  state,  with  equal  posi- 
tiveness,  that  it  should  be  credited  with  just  the  "subscribed 
capitar'of  the  company,  and  a  third  class  assure  us',  that  the 
correct  way  is  to  credit  the  Capital  Stock  Account  at  once 
with  the  "authorized  capital."  Now  these  statements  are  all 
too  dogmatic.  Circumstances  connected  with  the  organiza- 
tion of  a  company  and  the  manner  of  selling  or  disposing  of 
its  stock,  must  determine  in  individual  cases  which  plan  is  the 
most  practical.  If  the  organizers  of  a  company  take  up,  or 
otherwise  dispose  of  all  the  stock  they  wish  to  place  at  the 
time  of  organization,  and  they  pay  for  it  in  cash  or  other  ex- 
change of  value,  the  first  method  is  undoubtedly  the  best.  If, 
on  the  other  hand,  they  subscribe  for  a  greater  amount  of 
stock  than  they  pay  for,  it  will  be  found  more  convenient  to 
credit  the  Capital  Stock  at  once  for  the  subscribed  capital; 
besides  they  are  bound  by  their  subscriptions,*  and  the  unpaid 
balance  is*  an  asset.  To  find  the  "paid-up  capital,"  it  is  only 
necessary  to  find  the  amount  due  on  subscription  and  sub- 
stract  it  from  the  subscribed  capital.  If  a  certain  amount  of 
the  capital  stock  is  subscribed  for,  and  the  balance  is  placed 
in  the  treasury,  so  called,  or  in  the  hands  of  trustees  to  be  sold, 
it  will  be  found  necessary  to  credit  capital  stock  with  the  full 
capital,  since  the  amount  not  already  subscribed  for  is  con- 
verted into  treasury  stock,  so  called,  and  there  are  no  further 

*Vide  paragraph  244. 


216 


CORPORATION    ACCOUNTING 


entries  to  be  made  to  the  Capital  Stock  Account,  unless  the 
stock  is  either  increased  or  decreased, — of  course  this  kind  of 
treasury  stock  will  be  a  negative  to  capital  stock,  and  it  should 
be  deducted  from  the  "Nominal  Capital"  when  making  up  a 
statement. 

549.  When  stock  is  sold  on  the  instalment  plan  there  are 
various  ways  of  entering  the  sale  and  the  payments  on  the 
books  of  the  company.  One  way  is,  where  the  number  of 
stockholders  is  limited,  and  the  number  of  instalments  few, 
to  open  a  Subscription  Account  and  write  the  names  of  each 
subscriber  thereon,  debiting  the  subscriber  with  the  amount 
of  his  subscription,  and  leaving  as  many  blank  lines  opposite 
his  name  as  there  are  instalments  to  be  paid,  and  then  credit- 
ing Capital  Stock  with  the  full  subscription.  As  the  instal- 
ments are  paid  credit  Subscription  Account,  each  subscriber 
opposite  his  name.  When  they  are  all  paid  Subscription  Ac- 
count will  balance,  and  the  subscribed  capital  will  then  be  the 
paid  up  capital  of  the  company. 

550.  Another  way  is  to  open  Instalment  Accounts  for  each 
instalment,  and  designate  them  by  number.  Just  before  an 
instalment  falls  due,  open  one  of  these  accounts,  charge  it 
with  the  amount  of  the  instalment  and  credit  Capital  Stock; 
then  as  the  instalments  are  paid  credit  it ;  the  balance  on  any 
one  of  these  accounts  will  show  the  amount  still  due  on  a  par- 
ticular instalment.  Sometimes  instalment  scrip*  is  issued  for 
these  instalments,  and  an  Instalment  Book  is  kept  of  which 
the  following  is  an  illustration : 

551.  INSTALMENT  BOOK. 

Instalment  No.  1  of  10  per  cent,  due  Oct.  1, 1905.    Payable  Oct.  1  to  30. 


Folio 


Names  of  Subscribers 


John  Smith 
Paul  Jones 
Albert  Brown 


No. 
Shrs. 

Amount 
Instal- 
ment 

When 
Paid 

Amount 
Paid 

100 
50 
50 

100 
50 
50 

00 
00 
00 

Oct. 

1 
2 

100 
60 

GO 
00 

Remarks 


552.  This  form  explains  itself.  The  payments  as  made 
are  entered  opposite  the  names  of  those  making  the  payments, 
and  the  record  always  shows  the  names  of  those  who  have 
not  paid.  The  Stubs  of  the  Scrip  Book  are  footed  up  every 
night  and  the  total  payments  for  each  day  are  entered  in  one 
sum  in  the  Cash  Book  and  posted  to  the  credit  of  the  Instal- 


^Vide  paragraph  251. 


AND   CORPORATION   LAW  217 

tnent  Account.  The  Instalment  Account  shows  the  amount 
due  at  any  time  on  instalments,  and  the  Instalment  Book  gives 
the  names  of  those  who  are  owing.  The  ''Folio"  column  is 
only  used  where  the  method  of  crediting  each  stockholder  on 
his  acocunt  in  the  Stock  Ledger,  for  the  amount  he  pays  on 
his  stock,  is  adopted. 

553.  Still  another  way  is,  where  the  number  of  instal- 
ments are  many,  say  from  ten  to  twenty,  and  they  are  due  on 
the  first  of  every  month  and  payable  any  time  within  the 
month,  (with  a  possible  extension  of  time),  and  the  payments 
are  coming  in  every  day,  the  most  practical  way  is  to  open 
an  account  with  each  stockholder,  debit  him  for  the  amount 
of  his  subscription,  and  credit  Capital  Stock  in  one  entry  for 
the  aggregate.  He  then  becomes  the  company's  debtor  and 
his  account  is  credited  for  payments  the  same  as  any  other 
personal  account. 

554.  Some  object  to  this  method  and  say,  that  there 
should  be  no  accounts  in  the  General  Ledger  with  stockhold- 
ers, but  that  such  accounts  should  be  in  the  Stock  Ledger, 
and  the  Stock  Ledger  only.  The  writer  fails  to  see  any  good 
argument  in  this.  The  stockholder  is  the  company's  debtor, 
or  the  creditor's  debtor,  in  the  amount  of  his  unpaid  subscrip- 
tion, and  this  amount  being  collectible  at  law,  it  becomes  an 
asset  of  the  company,  and  properly  belongs  in  one  shape  or 
another  on  the  general  books  of  the  company.  Of  course  it 
is  a  negative  asset,  as  far  as  the  company  is  concerned,  being 
negatived  or  offset  by  the  Capital  Liability"^  its  issue  created ; 
but  it  is  a  positive  asset  as  regards  the  claims  of  the  creditors. 
Whether  this  amount  stands  on  the  books  of  the  company  as 
Subscription  Account,  Instalment  Account,^  or  as  so  many 
personal  accounts,  it  makes  no  difference  in  law,  and  no  dif- 
ference as  far  as  correct  accounting  is  concerned ;  it  is  simply 
a  matter  of  practicability  and  convenience. 

555.  Here,  however,  arises  a  new  question.  When  Treas- 
ury Stock  is  debited,  it  has  to  stand  on  the  books  of  the  com- 
pany as  an  asset,  and  it  is  contended  that  as  nothing  of  value 
has  been  received  for  it,  it  is  not  properly  speaking  an  asset.^ 
Others  contend  that  the  charter  of  the  company  gives  a  value 
to  its  stock.  Now  as  before  stated,  this  class  of  treasury  stock 
is  merely  a  negative^ asset,  and  in  making  out  an  annual,  or 
other  periodiCafstatement,  the  amount  of  the  treasury  stock 
can  be  left  out  of  the  list  of  assets,  and  an  equivalent  amount 

*Vide  paragrahp  448, 
*iVide  paragraph  459. 
*2Vide  paragraph  304. 


218  CORPORATION    ACCOUNTING 

taken  off  the  capital  stock  as  a  liability;  this  would  make  the 
net  liability  to  stockholders  appear  correctly  on  the  statement. 
For  the  other  claim  the  charter  of  the  company  only  authorizes 
the  company  to  sell  so  many  shares  of  stock  at  a  certain  nom- 
inal value,  but  it  does  not  give  these  shares  an  active  or  real 
value ;  that  value  must  be  originally  based  on  the  property  of 
the  company  against  which  the  shares  are  issued,  and  subse- 
quently on  the  property  and  prospects  of  the  company. 
Neither  the  capital  stock  nor  treasury  stock  are  ever  appraised 
or  inventoried ;  they  stand  on  the  books  at  their  nominal  value, 
and  the  respective  accounts  are  credited  for  sales  at  nominal 
value,  whether  the  stock  sells  at  a  premium  or  at  discount. 
Some  few  accountants  do  not  take  the  amount  of  the  paid  up 
capital  into  the  statement  as  a  liability,  but  add  it  to  the  sur- 
plus and  call  the  sum  the  "Present  Worth"  of  the  company. 
This  method  is  wrong,  as  it  is  very  apt  to  mislead,  and  by  it 
the  company  might  be  made  to  show  that  it  was  worth  a  cer- 
tain sum,  when  it  was  really  insolvent,  as  it  is  when  its  capital 
is  impaired. 

BOOKS  AND  ACCOUNTS  OF  'THE  GOLD  AND 
SILVER  MINING  COMPANY." 

556.  In  every  well  regulated  business*  of  goodly  propor- 
tions there  are  at  least  two  Journals,  and  two  Ledgers,  namely, 
a  Sales  Journal,  and  Purchase  Journal,  and  a  Sales  Ledger  and 
Purchase  Ledger.  The  first  set  contains  all  the  sales,  and  the 
second  set  all  the  purchases.  Sometimes*  one  bookkeeper 
keeps  the  Sales  Ledger,  and  another  the  Purchase  Ledger,  and 
they  each  have  their  own  Journal,  and  never  interfere  with 
each  other  in  posting.  When  one  keeps  both  Ledgers  it  is 
equally  convenient  for  posting  purposes ;  and  where  the  busi- 
ness is  not  large  enough  to  justify  the  use  of  two  sets,  the 
Journal  and  Ledger  can  be  divided  into  two,  by  keeping  all 
the  sales  in  the  beginning  of  the  books,  and  all  the  purchases 
in  the  back  of  them.  A  General  or  Private  Ledger  should  be 
kept  for  all  the  Private  and  Representative  Accounts  of  the 
company.  This  is  kept  by  the  head  bookkeeper,  and  he  is  the 
only  one,  outside  the  proprietors  or  manager,  who  has  any 
knowledge  of  the  private  affairs  of  the  company.  This*  Ledger 
contains  its  own  Index  and  Journal,  and  carries  accounts  with 
the  other  Ledgers  as  if  they  were  individuals ;  and  in  this  way 
is  an  epitome  of  the  entire  business  of  the  company.  It  is  fre- 
quently made  with  a  neat  little  spring  lock  to  it  and  is  assess- 
able only  to  the  man  who  carries  the  key.     By  this  means 


AND   CORPOKATION   LAW  219 

a  knowledge  of  the  private  affairs  of  a  concern  is  kept  from 
subordinates. 

557.  In  the  set  which  follows,  the  only  object  aimed  at 
is  to  show  the  working  of  the  books,  and  the  handling  of  some 
of  the  accounts.  In  the  ordinary  course  of  business  many 
more  accounts  would  be  carried,  which  are  omitted  for  sake 
of  brevity.  The  manner  of  closing  Resource,  Expense  and 
Property  Accounts,  can  be  illustrated  as  well  with  a  few  as 
with  a  great  number.  Accounts  have  been  purposely  opened 
with  the  stockholders  to  show  that  it  is  practical  to  do  so,  and 
to  show  that  there  is  no  harm  in  doing  so ;  inasmuch  as  they 
will  soon  be  closed,  and  will  never  appear  on  any  but  the  first 
Ledger. 

Description  of  the  Cash  Book. 

558.  The  company  in  this  case  derives  revenue  from  three 
sources — the  stockholders,  the  mill  customers,  and  the  mine 
itself.  The  product  of  the  mine  is  called  ''bullion,"  when  it  has 
reached  that  stage  in  the  process  of  reduction  that  fits'  it  for 
shipment  to  the  Mint.  The  Mint  coins  it,  making  a  slight 
charge  therefor,  which  is  called  ''Mint  Charges."  An  entry 
is  then  made  in  the  Cash  Book  for  the  amount  realized,  and 
the  Bullion  Account  is  credited  at  the  end  of  the  month  for  the 
month's  "clean-up."  All  other  items  on  this  side  are  posted 
from  day  to  day.  The  extra  columns  on  the  credit  side  are 
posted  only  once  a  month,  and  the  miscellaneous  column  from 
day  to  day.  The  Cash  Book  is  closed  every  month  as  illus- 
trated.   Vide  pages  225  and  226. 

Explanation  of  the  Journal. 

559.  The  first  part  of  the  Journal  is  used  for  entering  the 
sales  of  stock ;  after  that  it  is  used  as'  a  General  Journal.  The 
extra  columns  for  capital  stock  and  treasury  stock  are  to  pre- 
vent too  frequent  posting  to  these  accounts.  These  columns 
have  been  used  in  this  way  for  the  purpose  of  showing  their 
utility.  Ordinarily,  only  the  total  of  each  day's  sales  would 
be  extended  into  the  credit  column  of  Capital  Stock.  In  the 
Purchase  Journal,  individual  accounts  are  credited  in  the  "Mis- 
cellaneous Credit"  column ;  and  Machinery  and  Tools,  and 
Stores  and  Supplies  debited  in  their  respective  columns.  For 
rebates  or  returns  the  individual  would  be  debited  in  the  "Mis- 
cellaneous" column,  and  the  other  accounts  credited  in  their 
respective  columns.  The  total  debits  and  credits  of  the  extra 
columns  are  posted  at  the  end  of  the  month.  Vide  pages  227 
and  228. 


220 


CORPORATION    ACCOUNTING 
Closing  Entries  in  the  Journal. 


560.  It  will  be  observed  that  in  the  closing  entries  some 
new  accounts  have  been  opened.  The  reason  for  doing  so  is, 
that  all  the  assets  and  liabilities  of  the  company  should  appear 
on  the  books  at  the  time  of  closing,  otherwise  the  books  do  not 
show  the  true  standing  of  the  business.*  The  Bullion  Account 
is  credited  for  only  the  Mint  returns,  but  at  the  time  of  closing 
the  books,  there  is  a  certain  amount  of  ore  in  that  state  of  re- 
duction known  as  "Amalgam."  This  has  an  intrinsic  value, 
and  is  a  part  of  the  assets  of  the  company.  It  is  therefore  ap- 
praised, and  its  value  placed  on  the  books  in  the  manner 
shown.  It  is  credited  to  Profit  and  Loss  for  the  reason  that 
it  is  a  part  of  the  company's  product,  same  as  Bullion.  The 
next  year,  or  the  next  time  of  closing  the  books,  this  Journal 
entry  is  not  necessary.  The  Amalgam  Account  is  carried  on 
the  books  as  an  asset  until  the  next  time  of  closing,  when  the 
amalgam  is  again  appraised,  and  its  appraised  value  written 
on  the  Amalgam  Account  as  "Inventory,"  the  difference  be- 
tween the  two  sides  of  this  account  after  the  entry,  is  carried 
to  the  debit  or  credit  side  of  the  Profit  and  Loss  Account  ac- 
cording as'  it  is  greater  or  less,  and  then  the  accotmt  is  closed 
and  the  "Inventory"  value  carried  down.  The  following  is  an 
illustration. 


561. 


AMALGAM  ACCOUNT. 


1905 
Dec. 

1006 
Dec. 

31 

31 

To  Inventory 
"   Profit  &  Loss 

To  Inventory 

1,000 
500 

00 
00 
00 

00 

1906 
Dec. 

31 

By  Inventory 

/ 

1,500 

00 

31 

1.500 
1,500 

1,500 

00 

1906 
Dec. 

562.  The  above  account  shows  that  there  is  an  increase 
in  the  Amalgam  Account  of  $500  over  last  year,  and  this  in- 
crease is  taken  to  Profit  and  Loss  and  the  inventory  carried 
down  on  the  debit  side  of  the  account.  If  the  mine  should  be 
shut  down  between  periods,  the  books  should  be  closed,  and 
the  present  value  of  amalgam  shown  on  the  books. 

563.  Another  way,  and  a  better  way,  is :  Credit  all  ex- 
penses at  the  end  of  every  month,  and  debit  a  ''Development, 

*Vi(ie  paragraph  439. 


AND   CORPORATION   LAW 


221 


Ore  and  Bullion  Account."  This  will  give  us  the  cost  of  de- 
velopment, ore,  etc.,  and  it  will  be  an  asset  to  this  extent. 
Credit  "Bullion  Sales"  for  sales  of  bullion,  and  debit  cash  for 
same.  At  the  end  of  each  period,  credit  "Development  Ore 
and  Bullion  Account"  with  the  amount  of  development  and 
ore,  or  ore  and  amalgam  on  hand,  at  cost  of  production,  and 
with  the  bullion  on  hand  at  its  worth,  and  bring  this  down  on 
the  debit  side  as  "Inventory"  or  "Asset  value."  Credit  it  with 
the  difference  between  the  inventory  and  cost,  and  debit  Bul- 
lion Sales ;  the  balance  of  the  Sales  Account  will  then  repre- 
sent profits  on  operating.  We  inventory  ore  and  amalgam  at 
cost,  because  we  must  not  figure  profits  on  the  future.  Vide 
paragraph  567.  We  inventory  bullion  at  what  it  is  worth,  be- 
cause it  is  a  "cash  asset"*  and  the  profit  on  it  belongs  to  the 
present.  We  debit  Bullion  Sales  for  cost  of  production,  so  as* 
to  get  the  difference  between  cost  and  selling  price,  which  is 
profit. 

564.  We  owe  for  labor  at  the  time  of  closing,  for  say,  the 
December  pay  roll,  and  as  it  is  one  of  the  company's  obliga- 
tions, it  must  appear  on  the  books  as  a  liability.^  We  therefore 
debit  Profit  and  Loss  Account  for  this  amount,  for  the  reason 
that  our  apparent  gain  is  that  much  less,  and  we  open  a  new 
account  which  we  call  "Accrued  Wages"  or,  it  would  be 
better  to  debit  "Expense  Labor"  for  the  amount,  so  that  this 
account  might  show  the  entire  cost  of  labor;  and  afterwards 
close  this  account  into  Profit  and  Loss  Account.  In  the  first 
case  the  Accrued  Wages  Account  stands  on  the  company's 
books  as  a  liability  until  the  next  time  of  closing,  when  it  is 
treated  in  a  manner  similar  to  the  Amalgam  Account.  In  tTie 
latter  case  it  is  debited  for  the  December  pay  roll  when  it  is 
paid,  and  the  account  closed. 


565. 


ACCRUED  WAGES. 


1905 
Dec. 

31 

To  Inventory 

(red  ink) 
"    Profit  &  Loss 

/ 

500 
500 

00 
00 
00 

1905 
Dec. 

1906 
Dec. 

31 
81 

Dec   Pay  Roll 
By  inventory 

1,000 

00 

1,000 

1,000 

00 

500 

00 

*Vide  paragraph  445. 
iVide  paragraph  439. 


222  CORPORATION    ACCOUNTING 

566.  This  account  shows  that  we  owe  $500  less  for  labor 
at  the  end  of  the  second  year,  consequently  we  have  gained 
$500  on  this  account  (in  that  we  do  not  owe  as  much),  which 
amount  we  credit  to  Profit  and  Loss  Account,  and  we  bring 
down  the  "Inventory"  on  the  credit  side  for  the  amount  we 
still  owe  for  labor. 

Still  Another  Way. 

567.  If  it  was  a  crude  petroleum  oil  business  instead  of  a 
mining  business,  we  would  have  a  Production  Account  to  rep- 
resent the  product,  and  a  Sales  Account  to  represent  the  sales ; 
or  we  could  combine  the  two  in  one  "Product  and  Sales  Ac- 
count," and  treat  it  as  we  would  a  Merchandise  Account.  As 
a  matter  of  correct  accounting,  the  product  should  be  charged 
at  what  it  cost  to  produce  it;  for  to  inventory  it  for  what  we 
think  it  is  going  to  sell  for,  is  to  figure  in  profits  that  have  not 
yet  been  earned,  and  will  not  be  earned  until  the  sale  is  made 
— the  product  is  of  the  present,  the  profits  of  the  future,  and 
the  profits  of  what  remains  on  our  hands  at  the  close  of  the 
period  belong  to  the  next  period,  when  it  is  sold.  If  we  were 
in  the  refining,  as  well  as  the  producing  business,  the  crude 
product  would  be  the  first  item  in  our  ''Manufacturing  Ac- 
count*— the  Raw  Material. 

568.  It  is  not  necessary  that  the  closing  entries  be  made 
in  the  Journal,  but  it  is  considered  by  competent  accountants 
to  be  the  best  and  most  fitting  way  to  close  the  books. 

Explanation  of  the  Ledger. 

569.  Some  account  or  accounts  have  to  be  opened  in  the 
Ledger  to  represent  the  property  owned  by  the  company.  In 
this  case  the  only  property  the  company  has  at  the  outset  is 
the  mine.  This  mine  was  owned  by  some  of  the  promoters  of 
the  company,  who  assigned  their  title  and  interest  therein  to 
the  company  at  the  time  of  its  organization,  the  consideration 
being  a  certain  number  of  shares  of  the  paid-up  stock  of  the 
company.  The  account  to  be  debited  in  this  instance  is  a 
"Mine  Account,"  which  is'  debited  for  the  par  value  of  the 
stock  issued  for  it;  and  the  assignors  or  vendors  are  credited 
for  a  corresponding  amount.  Then  the  promoters  are  debited 
for  the  stock  issued  to  them,  which  balances  their  accounts, 
and  Capital  Stock  is  credited.  It  goes  without  saying,  that  the 
promoters  reserve  enough  stock  for  themselves  to  compensate 
them  for  the  property  they  turn  over  to  the  new  company. 

*Vide  paragraph  422. 


AND   CORPORATION   LAW  223 

An  account  is  then  opened  for  Machinery  and  Tools,  which  is 
debited  for  all  the  machinery  and  tools  purchased  by  the  com- 
pany, or  a  "Plant  Account"  is  opened  which  is  debited  for  ma- 
chinery, tools,  lumber,  buildings,  horses,  wagons,  etc.  An  ac- 
count is  also  opened  for  stores  and  supplies'  which  is  charged 
for  powder,  fuse,  caps,  candles,  oils,  mercury,  quicksilver,  fuel, 
etc.,  etc.  The  expense  account  can  be  subdivided  as  fine  as 
one  pleases,  or  it  may  be  all  kept  under  one  general  head — 
"Expense,"  but  this  general  term,  like  charity,  covers  a  multi- 
tude of  defects'  sometimes,  and  it  is  more  satisfactory  to  know 
how  much  was  expended  under  the  different  heads.*  In  this 
way  the  stockholders  are  better  informed  of  the  internal  af- 
fairs of  the  company,  and  it  affords  them  as  well  as  the  di- 
rectors, an  opportunity  of  demanding  retrenchments  in  certain 
directions.  Vide  pages  229  and  230. 

Closing  the  Ledger. 

570.  Before  the  "Machinery  and  Tools,"  or  "Plant  Ac- 
count" are  closed,  they  are  first  inventoried,  or  a  Depreciation 
Fund^  is  started,  or  a  Depreciation  Account  opened,-  a  certain 
amount  being  written  off  to  Profit  and  Loss  for  wear  and  tear. 
The  amount  it  is  inventoried  for  is  written  on  the  credit  side 
in  red  ink,  and  the  difference  between  the  two  sides  is  written 
"Profit  and  Loss,"  immediately  under  it,  also  in  red  ink.  Profit 
and  Loss  is  debited  for  this  difference,  and  then  the  inventor}^ 
is  brought  down  on  the  debit  side  of  the  account. 

571.  The  "Stores  and  Supplies"  is  also  inventoried.  What- 
ever supplies  are  on  hand  are  valued,  and  the  amount  written 
on  the  account  as  "Inventory,"  this  account  is  then  treated  in 
the  same  manner  as  the  foregoing  account. 

572.  If  any  account  of  expense  has  anything  of  value  re- 
maining in  it,  it  is  also  inventoried  and  closed  same  as  the 
"Stores  and  Supplies  Account,"  for  example,  Fuel  Account, 
if  a  separate  account  is  kept  for  it.  We  should  also  inventory 
Insurance  Account  and  Taxes  Account,  for  the  amount  of  in- 
surance and  taxes  which  are  paid  in  advance.  These  accounts 
are  inventoried  by  writing  the  amount  of  the  unexpired  insur- 
ance and  unexpired  taxes  on  the  credit  side,  and  then  carrying 
the  difference  between  the  two  sides  to  Profit  and  Loss,  and 
bringing  down  the  amount  of  the  inventory  on  the  debit  side 
as  an  asset.    Only  the  expired  amount  of  Insurance  and  Taxes 

*Vide    paragraph    412. 
iVide  paragraph  393. 
2Vide  paragraph  400. 


224 


CORPORATION    ACCOUNTING 


is  a  part  of  the  losses  of  the  year's  business — the  same  is  true 
of  "Rent"  Account  and  all  such  similar  accounts.  Vide  para- 
graph 413. 

573.  Read  paragraphs  on  Depreciation,  Reserves,  Expen- 
diture, Prepaid  Expense,  etc.,  in  Chapter  8,  for  other  and  fur- 
ther methods  of  closing  accounts. 

574.  All  accounts  that  are  wholly  loss  are  carried  to  the 
debit  side  of  Profit  and  Loss  Account,  and  all  accounts  that 
are  wholly  gain  are  carried  to  the  credit  side  of  Profit  and 
Loss.  This  account  is  then  balanced,  and  the  balance  carried 
to  Surplus  Account,  or  to  Surplus  Account  and  Dividend  Ac- 
count, or  to  whatever  accounts  the  directors'  order.  Before 
this  is  done,  a  Trial  Balance  is  taken  to  make  sure  that  the 
books  are  in  balance  before  we  attempt  to  close  them,  and 
after  that  the  ''Statement  of  Assets  and  Liabilities"  is  taken 
off. 

575.  Form  of  Pay  Roll. 

PAY  ROLIy  OF  BIG  LUCK  MINE 

For  the  Month  of 190. . 

We,  the  undersig-ned,  acknowledge  having- received  the  amount  set 
opposite  our  respective  names,  and  each  one  for  himself  hereby  certi- 
fies that  the  net  amount  for  which  he  has  signed  is  in  full  payment  for 
services  for  the  time  hereinbelow  specified  and  in  full  for  all  claims 
ag-ainst  the  Goi^d  an»  Sii^ver  Mining  Company,  to  and  including-  the 
day  of 190 


Names 


No. of 
Days 

Rate 

Gross 
Amount 

Deduc- 
tions 

On  Acc't 
of 

Net  Amt. 
Due 

Signatures 


Total  Pay  Roll      

Deductions  , 

Net  amt.  due  for  labor 


Remarks 


Supt. 


576.  This  form  of  loose  leaf  pay  roll  is  made  out  in  dupli- 
cate, the  superintendent  keeping  the  original  and  sending  the 
duplicate  to  the  office  of  the  company  v^here  it  is  checked  over, 
and  from  whence  the  check  or  checks  are  made  out.  The  su- 
perintendent has  the  original  signed  and  returns  it  to  the  office 
of  the  company  where  it  is  filed  away  same  as  a  voucher  in  a 
regular  "pay  roll"  binder. 


AND   CORPORATION   LAW 


225 


577. 


CASH   RECEIVED. 


Date 
1905. 

Folio 

Accounts 

Particulars 

Misc. 
Credits 

Bullion 
Acc't. 

Total 

Oct. 

1 
16 

William  Glass 
J.  J.  Rahill 
Geo.  Babcock 
M.  S.  Hutchison 
G.  W.  Lister 
W.  A.  Bloodgood 
J.  W.  Short 
Chester  H.Rowell 

Balance  on  hand 
William  Glass 
J.  W.  Short 

Bullion  Account 
J.  J.  Rahill 
Geo.  Babcock 
G.  W  Lister 
Chester  H  Rowell 
W.  A.  Bloodgood 
M.  S.  Hutchison 

Bullion  Account 

Balance  on  hand 
Chester  H.  Rowell 
William  Glass 
M.  S.  Hutchison 
J.  J.  Rahill 
Bullion  Account 
G.  W.  Lister 
Geo.  Babcock 
Bullion  Account 

Bullion  Account 
Balance  on  hand 

1st  Installment,  20  Shs. 

<< 

On  Account 

In  full  for  500  Shares 

1st  Installment,  500  Shs. 

2d  Installment,  20  Shs. 
1st       "       Treas.lOO" 
Prem.  on        "       Stock 
October  clean-up 
2d  Installment 

500  Shs. 
On  Account 
2d  Installment 

3d  In.  500,  2d  on  100  Shs. 
3d  " 
3d  " 
3d  " 
Clean-up 
3d  Installment 
<< 

For  Clean-up 

20 
20 
20 
20 
20 
15 
9,000 
500 

00 
00 
00 
00 
0 
00 
00 
00 

00 
00 
00 

00 
00 
00 
00 
00 
00 

00 

00 
'0 
00 
00 

00 
00 

00 

1,000 

00 
00 

00 

00 
00 

20 
100 
400 

20 
20 
20 
500 
150 
20 

1,000 

1 

2 
3 

15 

20 
25 
<• 

30 

9,615 

00 

6,008 
2,250 

50 

Nov. 

2 

1,000 

1,200 
1,150 

00 

600 
20 
20 
20 

20 
20 

2,350 

8,258 

50 

7,408 
3,050 

Dec. 

1 
2 
10 

25 

31 
1 

1 
1 
1 
1 

1 
1 

2 

50 

2,350 

00 

1906 

10,458 

50 

9,722 

Jan. 

oO 

N.  B.— The  first  method  described,  that  of  making  no  entry  of  product  until  the 
bullion  is  sold,  is  the  method  employed  here. 


226 


578. 


CORPORATION    ACCOUNTING 

CASH  PAID. 


Date 
1905 

.2 
1 

1 

2 

Accounts 

Particulars 

Misc. 
Debits 

£x. 
General 

Ex. 
Labor 

Total 

Oct. 

1 

12 

20 

31 
3 

Wm.  Glass 

Trip  of  Directors 
Assays  $10,  Ex  pre 
Freight  on  powde 
Demerest  &  Fullen 
Express  on  tools 

Expense  General, 
Balance  on  hand 

For  money  advanc'd 
to  defray  expenses 
of    incorporation, 
per  vouch,  on  file 

to  mine 

ss  on  ore  samples  $5 

r,  C.  P.W. 

on  account 

from  J.  T.  &  Co. 

for  Oct. 
(red  ink) 

3,500 
106 

00 
50 

30 

50 
15 
10 

1 

00 

00 
00 
00 

50 
50 

3,606 

6,008 

106 

50 
50 

9,615 

00 

Nov. 

1 

1 

3 

10 

15 
30 

1 

1 
1 

Pay  Ro  11  for  Octo 
Telephone  Bills 
Freight    on  comp 
C,  T.  Cearley,  Boo 
Fresno  Republic'n 
Cal.  Powder  Works 

Expense  General, 
"        Labor.for 

Balance  on  hand 

ber 

ressor 

ks  &  Stationery 

Adv.  and  Printing 

for  Nov. 
Nov. 

(red  ink) 

250 

100 
500 

00 

00 
00 

10 
25 

40 
25 

00 
00 
00 
00 

00 

500 

00 

850 
7,408 

100 

500 

00 

00 
50 

8,258 

50 

Dec. 

1 

1 

10 
31 
31 

31 
81 

31 

1 

1 
1 

Telephone  Bills 

Assays 

Pay  Roll  for  Nove 

John  Taylor  &  Co. 

C.  H.  Riege 

Attorney's  Fees 

Expenses  General, 
"        Labor.for 

Balance          and 

mber 

on  account 
Dividend  Book 
1st  Quarter 

for  Dec. 
Dec. 

15 

71 
650 

00 

00 
00 

12 
5 

3 
50 

50 
00 

50 
00 

00 

650 

00 
00 

736 
9,722 

71 

650 

00 
50 

10,4 

50 

The  narrow  compass  of  a  page  will  not  permit  the  amplification  of  a  proper 
system,  hence  I  have  charged  freight,  etc.,  to  current  expense,  but  would  direct  the 
readers'  attention  to  paragraph  419,  headed  "Trading  Account,"  for  correct  method  of 
charging  freight. 


AND   CORPORATION   LAW 


227 


579.       SALES  AND   GENERAL  JOURNAL. 


OCTOBKR   1,   1005 


Treas'y 
Stock 


28,000 


28,000 


00 


Capital 
Stock 


Misc. 
Debits 


400  00 
400  00 
400  00 
400,00 
400  00 


25,000 
25,000 


10,»00 
10,000 


15 


1,000 


2,400 


150 


2,400 


28,000 


105,965 


00 


00 


00 


00 


Particulars 


Gold  and  Silver  Mining 
Co  ,  organized  this 
day,  under  the  laws 
of  California,  with  a 
Nominal  Capital  of 
1100,010,  divided  into 
5,000  Shares  of  |20  each 
Sundries  Dr. 

To  Capital  Stock 
Wm.  Glass  20Sh8. 

J.  J.  Rahill  20    " 

Geo.  Babcock  20  " 
M.  S.  Hutchison  20  " 
G.  W.  Lister  20    " 


Wra.  Glass 
J.  J.  Rahill 


1250  Shs. 
1250    " 


10 


Chester  Rowell  500  Shs. 
J.  W.  Short  500    " 

Treasury  Stock 

To  Capital  Stock 
Sale  of  Stock  closed 
and  balance  placed  in 
Treasury,  as  per  reso- 
lution of  Board  of  Di- 
rectors. Minute  Book 

page 

15 
W.  A.  Bloodgood 

To  Custom  Wk.  Ace. 
Milling  10  tons  of  ore  @ 

1.50  per  ton 
Discount  Account 
To  J.  W.  Short 
10  per  cent  dis.  for  cash 

November  1 
J.  W.  Short 

To  Treasury  Stock 
Stock  Prem.  Acct 
Short  buys  100  Shares  of 
Treasury  Stock  at  a 
premium  of  20  per  ct  , 
as  per  resolution  of 
Board  of  Directors. 

Minute  Book  page 

10 
W.  A.  Bloodgood 

To  Custom  Wk.Acct. 
100  tons  ore  at  1.50  per 
ton 

December  1 
Chester  Rowell 

To  Treasury  Stock 
"  Premium  Acct. 
He  buys  100  Shares  of 
Treasury     Stock      at 
Prem.  of  20  per  cent. 

Treasury  Stock  (total) 
To  Cap.  Stock  (total) 
"  Treas.Stock(sold) 


Misc. 
Credits 


15 


1,000 


400 


150 


400 


00 


00 


00 


Capital 
Stock 


2,000 


00 


25,000  00 
25,000  00 


10,000 
10,000 


28,000 


00 


00 


100,000  00 
4,000  00 

105,965  !~0 


100,000 


Treas'y 
Stock 


2,000 


2,000 


4,000 


00 


00 


00 


It  will  be  noticed  that  Premium  Account  and  Discount  Account  are  entered  to  Profit 
and  Loss  inclosing  this  set.  This  is  given  as  one  way— not  the  best  way— of  closing  these 
accounts.  See  paragraph  320-2  for  best  method  of  disposing  of  Premium  and  Discount. 


228 


CORPORATION    ACCOUNTING 


580.       SALES  AND  GENERAL  JOURNAL. 

December  31, 1905. 


Treas'y 
Stock 


Capital 
Stock 


Misc. 
Debits 


600 

750 

,027 


;,350 
165 
800 


10,572  50 


50 


Particulars 


Closing  Entries. 
Ex  Labor  to  Accrued  Wages 

amount  due  labor,  as  per 

December  Pay  Roll 
Amalgam  Account 

To  Profit  and  Loss 
Amalgam  on  hand,  as  per 

inventory 
Profit  and  Loss 

To  Expense,  General 
"  Expense,  Labor 
"   Discount  Account 
Bullion  Account 
Custom  Work 
Premium  Account 

To  Profit  and  Loss 
Profit  and  Loss 

To  Surplus  Account 
"   Div  Acct.,  1  per  cent 
For  disposition  of  net  gain 

per  resolution  of  Board 

of  Directors 


Misc. 
Credits 


600 


750 


277 
1,750 
1,000 


4,315 

880 
1,000 


10,572 


Capital 
Stock 


Treas'y 
Stock 


581. 


PURCHASE  JOURNAL. 

October  1, 1905. 


Mach'y 

&  Tools 

Stores  & 
Suppli's 

Misc. 
Debits 

1 

Particulars 

I 

Misc, 
Credits 

Stores  & 
Suppli's 

Mach'y 
&  Tools 

50,0TO0( 

)     1 

Mine  Account  to  Wm.  Glass 
J.J  Rahill 
For  their  title  and  interest 
in  Big  Luck  Mine 

25,0TO 
25,0TO 

TO 
TO 

7,500 

00 

250 

TO 

Machinery  and  Tools 
To  Demerest  &  Fullen 

10  S.  Mill,  per  contract 

Stoses  and  Supplies 
To  Cal  Powder  Works 
Ton  of  Giant  Powder 
18 

Machinery  and  Tools 
To  J.  Taylor  &  Co. 

Invoice  10-15-05 

7,5TO 
250 

TO 
TO 

15 

00 

15 

TO 

TO 
00 

TO 
TO 

4,0TO0( 

7,515  0 
250  0 

)     1 
) 

Demerest  &  Fullen 
To  Bills  Payable 
Notes  1,  2,  3  and  4,  B.  B.  1 

31 
Mach.  and  Tools  for  Oct. 
Stores  and  Supplies  for  Oct. 

Dec.  15 
Machinery  and  Tools 
Stores  and  Supplies. 

To  John  Taylor  &  Co. 

Invoice  of  December  13 

2 
1 

4,0TO 

TO 

"0" 
00 

— 

7,515 

250 

25 

61,765  0( 

61,765 

175 

200 

TO 

20 

TO 
TO 

45  0( 
175  0 

Stores  and  Supplies 
To  Cal.  Powder  Works 
Fuse  and  Caps 
31 
Stores  and  Supplies  for  Dec- 
Machinery  and  Tools      " 

1 

20 

00 
TO 

- 

175 

45 

220  0( 

220 

AND  CORPORATION  LAW 


229- 


582.    SALES  AND  GENERAL  LEDGER. 

Capital  Stock  I  J.  W.  Short 


Date 
1905 


Oct.  31 


Oct.  31 
Dec.  31 


Oct.  1 

1 

1 

1 

Nov.  3 

Dec.  1 


Oct.  1 

1 

1 

I 

Nov.  3 

Dec.  1 


Oct.  1 

1 

Nov.  3 

Dec.  1 


Oct.   1 

1 
Nov  25 
Dec.  1 


Oct.  1 

1 

Nov.  3 

Dec.  1 


Ex- 
plan - 


Sund's 


Jl 


Debit 


Credit 


100,000  00 


Treasury  Stock 


Balance 


100,000  00 


J  1  28,000  00 
Jl 


4,000  00 


William  Glass 


20Shs 

Jl 
CI 

400 

00 

20 

1250  Sh. 

J  1 
J2 
CI 
CI 

25,000 

00 

25,000 
20 
20 

J.  J.  Rahill 


20Shs. 
1250  Sh. 


Jl 

400 

00 

01 

20 

Jl 

25,000 

00 

J  2 

25,000 

CI 

20 

CI 

20 

Geo.  Babcock 


20  Shs. 


Jl 

400 

00 

CI 

20 

CI 

20 

CI 

20 

M.  S.  Hutchison 


20  Shs 


Jl 

400 

00 

CI 

20 

CI 

20 

CI 

20 

Q.  W.  Lister 


20  Shs, 


Jl 

400 

00 

CI 

20 

CI 

20 

CI 

20 

28,000 
24,000 


400 

380 

25,380 


360 
340 


400 

380 

25,380 


340 


400 


340 


400 
380 
360 
340 


400 


340 


Date 

1905 

Oct.  10 
15 
15 

Nov.  1 


Oct.  10 
15 
Nov.15 
Dec. 


Oct.  1 


Oct  31 
Dec.  31 


Oct.  31 
Dec.  31 


Dec.  31 


Oct.  15 
15 

Nov.  10 
20 


Oct.  15 
Dec.  31 


Ex- 
plan- 
ation 


500  Shs. 


100  Shs. 
$4001100 


Debit 


10,000 
2,400 


Credit 


9,000 
1,000 


500 


C.  H.  Rowell 


500  Shs. 

Jl 
CI 
CI 

10,000 

00 

500 
500 

100  Shs. 

Jl 
CI 

2,400 

00 

600 

00 


Bal'nce 


10,000100 
1,000  00- 
00  00 
2,400  00 
1,900  00 


Mine  Account 

BigLM  J3  50,000 


Machinery  and  Tools 


J  2    7,515  00 
J  2       175  00 


Stores  and  Supplies 


J2 

250 

00 

J 

45 

00 

137 

J2 

157 

137 

50 

Inv'try  137  50 

P   &  L.  J  2  157  50 

To  Inv. 


W.  A.  Bloodgood 


Jl 

15 

00 

CI 

15 

Jl 

150 

00 

CI 

150 

Discount  Account 


J.Short  J  1 
P.  &  L.J  2 


1,000  00 


1,000  00 


10,000 
9,500 
9,000 
11,400 
10,800 


50,000 


7,515 

7,< 


250 

295 

157 

00 

"137 


1,000 


00 


N.  B.— Credit  Balances  on  Debit  Accounts,  and  Debit  Balances  on  Credit  Accountsy 
should  appear  on  the  ledger  in  red  ink— otherwise  Cr.  and  Dr.  should  be  placed  before 
the  balance,  to  indicate  which  it  is . 


230 


CORPORATION    ACCOUNTING 


583.      S.  &  G.  LEDGER. 
2  Custom  Work 


Date 
1905 

Oct.  15 
Nov. 10 
Dec. 


Oct.  18 


Oct.  .SI 

Nov. 30 

Dec,  31 

31 


Nov.  1 

Dec.  1 

31 


Nov.30 

Dec.  31 

31 


Nov.30 

Dec.  31 

31 

31 


Dec  31 
31 
31 
31 
31 


©60.31 


Dec  31 


Dec.  31 


Dec.  31 


Ex- 
plan- 


Rl'dg'd 
Bl'dg'd 
P.  &  L. 


Debit 


165 


Credit 


15 
150 


Bills  Payable 


1,  2, 3, 4  J  2 


4,000  00 


Expense,  General 


CI 

106 

50 

Cl 

1(K) 

00 

CI 

71 

00 

p.  &  L. 

J2 

2  ■■' 

Premium  Account 


J.Short 

Jl 

400 

C  Ro'll 

J  1 

400 

P.  &  L. 

J2 

800 

00 

Bullion  Account 


P.  &  L. 


CI 

1,000 

CI 

2,350 

J 1 

3,350 

00 

Expense,  Labor 


p.  &  L. 


CI 

500 

00 

CI 

650 

00 

.7  2 

600 

00 

J2 

1,750 

Profit  and  Loss 


Amalg. 

J2 

750 

Sund's 

J  2 

3,027 

50 

Sund's 

J 

4,315 

8.  &  S 

J2 

157 

50 

Sund's 

J 

1,880 

00 

50 


Amalgam  Account 

Inv'try|J2|     7501    I  I 

Accrued  Wages 

|J2|  I     1        600100 

Surplus  Account 

P.  &  L.|J2|  n        880100 

Dividend  Account 


p.  &  L  J  2 


1,000  00 


Balance 


4,000 


106 
206 

277 


400 
800 


1,000 
3,350 


500 
1,150 
1,750 


C     750 
D  2,277 

C  2,037 
C  1,880 


D    750 


C     600 


CI,  000 


00 


00 


PURCHASE  LEDGER. 
Demerest  &  Fullen 


Date 
1905 


Oct.  10 
20 
20 


Oct  10 
Nov.15 
Dec.  15 


Oct  18 

Dec.  10 

15 


Ex- 
plan- 
ation 


lOSMill 
Bills  p. 


Debit 


3,500 
4,000 


Credit 


7,500  00 


Cal.  Powder  Works 


250  00 


250 
20 


John  Taylor  &  Co. 


15 
200 


Bal'n 


7,500 
4,000 


N.  B.— The  foregoing  accounts  have  been  opened  without  reference  to  any  particular 
order  or  system.  The  best  order  in  which  to  open  a  General  Ledger  is:  Capital  Ac- 
counts, Resource  Accounts,  Liability  Accounts,  Profit  Accounts,  Loss  Accounts,  or  in 
the  order  of  quick  and  slow  Assets,  Preferred  and  Unpreferred  Liabilities,  Capital 
Liabilities,  Profit  Accounts,  Loss  Accounts. 


AND   CORPORATION   LAW 


231 


584. 


TRIAL  BALANCE. 

January  1,  1906. 


Cash  on  Hand,  C.  B.  1 

9,722 

SO 

Capital  Stock 

100,000 

00 

William  Glass 

,     340 

00 

J.  J.  Rahill 

340 

00 

Geo.  Babcock 

340 

00 

M.  S.  Hutchison 

340 

00 

G.  W.  Ivister 

340 

00 

J.  W.  Short 

1,900 

00 

Chester  H.  Rowell 

10,800 

00 

Mine 

50,000 

00 

Machinery  and  Tools 

7,690 

00 

Stores  and  Supplies 

295 

00 

Discount  Account 

1,000 

00 

Custom  Work  Account 

165 

00 

Bills  Payable 

4,000 

00 

Expense,  General 

277 

50 

Premium 

800 

00 

Bullion  Account 

3,350 

00 

Eixpense,  I^abor 

1,150 

00 

Cal.  Powder  Works 

20 

00 

John  Taylor  &  Co. 

108,535 

^ 

200 

00 

108,535 

E 

585.  This  is  the  simplest  and  the  very  best  form  of  Trial 
Balance,  that  of  giving  only  the  balances  of  the  accounts.  I 
have  seen  Trial  Balances  taken  giving  both  the  Debit  and 
Credit  sides  of  the  account,  and  some  carry  this  even  further, 
giving  the  Debit  and  Credit  sides  of  the  accounts  and  the  Debit 
or  Credit  balance  of  each  as  the  case  may  be.  The  reader  can 
see  what  waste  of  time  and  what  folly  this  is.  It  means  simply 
double  or  treble  work  which  ever  course  the  plodding  book- 
keeper takes.  Just  imagine  what  it  means  where  there  are  a 
thousand  accounts  or  over,  it  means  a  thousand  extra  sets  of 
figures  to  be  transferred,  and  as  many  extra  to  be  added  up, 
and  as  many  more  to  be  gone  over  in  case  the  balance  does  not 
come  out  right  at  first. 

586.  Note :  As  stated  in  the  opening  of  this  set,  it  is 
merely  illustrative,  many  accounts  and  items  being  intention- 
ally omitted  so  as  not  to  be  too  prolix.  It  suggests'  a  simple 
method  of  keeping  a  set  of  books  for  a  mining  company  and 
at  the  same  time  points  out  the  way  to  more  complete  and  bet- 
ter methods,  the  details  of  which  would  take  up  too  much 
space. 


232 


587. 


CORPORATION    ACCOUNTING 

FIRST  ANNUAL  STATEMENT. 


Gold  and  Silver  Mining  Company. 
January  1, 1906. 
Assets. 

Due  from  Subscribers 

Machinery  and  Tools,  per  inventory 

Stores  and  Supplies,  per  inventory 

Amalgam,  per  inventory 

Mines,  per  inventory 

Cash  on  hand  and  in  Bank 

Total  Assets 

Liabilities. 

Capital  Stock |100,000 

Less  Treasury  Stock 24,000 

Accrued  Wages— December  Pay  Roll 

Bills  Payable  

Personal  Accounts  we  owe 

Dividends  Unpaid 

Surplus  Account— Present  Worth 

Total  Liabilities 

OR 

Liabilities. 

Accrued  Wages— December  Pay  Roll 

Bills  Payable 

Personal  Accounts  we  owe 

Dividends  Unpaid 

Working  Capital 


Working  Capital. 

Capital  Stock $76,000 

Surplus 880 


14,400 

7,690 

137 

750 

50,000 

9,722 


76,000 
600 

4,000 
220 

1.000 
880 


600 

4,000 

220 

1,000 

76,880 


00 


82,700 


82,700 


82,700 


00 


00 


587  a.      REOESIPTS  AND  DISBURSEMENTS,  PROFIT  AND  LOSS 


Receipts. 

Received  for  Stock  Subscriptions 

"  "    Custom  Work 

"  "    Bullion 

Total  Receipts 

Disbursements. 

Expense,  General 

Expense,  Labor 

Paid  for  Machinery,  Tools,  Etc 

Total  Disbursements 
Balance  on  hand  (red  ink) . . 

Profit  and  Loss. 
Profit  Account. 

Bullion  Sales 

Amalgam  on  hand 

Premiums  collected 

Custom  work  done 

Total  Gains 

Loss  Account. 

Expense,  Labor 

Expense,  General 

Discounts       

Stores  and  Supplies 

Total  Losses 

Net  Profit  (red  ink) 

Distribution  op  Profit. 

Dividend  Declared 

Transferred  to  Surplus 

Total 


11,400 
165 


277 
1,150 
3,765 


5,192 
9,722 


3,350 
750 
800 
165 


1,750 
277 

1,000 
157 


3,185 
1,880 


1,000 
800 


14,915 


14,915 


5,065 


5,065 


1,800 


00 


00 


00 


00 


00 


CHAPTER  XL 

Opening  the  books  of  a  Copper  Mining  Company — Stock 
Subscribed  for  in  Full  and  Paid  for  in  Cash — Mine  Purchased 
and  Paid  for  in  Cash — Two  Methods  of  Recording  the  Open- 
ing Entries. 


588.  A  company  is  formed  for  the  purpose  of  operating  a 
copper  mine.  The  stock  is  placed  at  $100,000,  divided  into 
1000  shares  of  $100  each;  the  stock  is  to  be  paid  for  in  full  and 
a  mine  known  as  The  Verdigris  Mine  is  to  be  purchased  out- 
right for  the  sum  of  $35,000,  and  improvements  thereon  for  an 
additional  $10,000.  The  incorporators  and  the  amount  of  stock 
for  which  each  one  has  subscribed  is  as  follows :  W.  A.  Fitz- 
gerald, $30,000;  W.  F.  Pitts,  $30,000;  H.  F.  Briggs,  $20,000; 
B.  R.  Walker,  $10,000;  H.  H.  Doyle,  $10,000.  What  are  the 
opening  entries? 

588  (a).  This  being  a  cash  transaction  the  simplest  and 
best  way  is  to  record  the  entries  in  the  Cash  Book  in  this  man- 
ner: 


589. 


CASH  BOOK. 


Capital  Stock    100,000.00 

For  1,000  Shares  of  Capital 
Stock  @  $100  as  follows: 

W.  A.  Fitzgerald  $30,000 

W.  F.  Pitts  30,000 

H.  F.  Briggs  20,000    • 

B.  R.  Walker  10,000 

H.  H.  Doyle  10,000 


Verdigris  Mine 35,000.00 

Plant,  Machinery,   &c 10,000.00 

Per  Deed,  and  Bill  of  Sale 
on  file  in  the  office  of 
the  County  Recorder, 
&c. 


590.  This  Opens  the  general  books  of  the  company.  Capital 
Stock  is  credited  with  $100,000,  Mine  is  debited  with  $35,000 
and  Plant  with  $10,000,  and  the  Cash  Book  shows  a  balance  of 
$55,000,  which  balances  the  books'.  The  proper  entries  are 
then  made  in  the  Stock  Ledger. 


234  CORPORATION    ACCOUNTING 

590  (a).  Another  way  would  be  to  make  the  opening  en- 
tries in  the  Journal  in  the  following  manner :  Debit  Subscrip- 
tion Account  and  credit  Capital  Stock  with  the  amount  of  the 
subscription;  and  when  the  stock  is  paid  for,  credit  Subscrip- 
tion and  debit  Cash  in  the  Cash  Book. 


CHAPTER  XII. 


Opening  the  Books  for  an  Oil  Company — Capital  Fully 
Subscribed — Payments  on  Subscription  Made  in  Equal  Instal- 
ments of  10% — Five  Methods  to  Choose  From. 


591.  An  oil  company  is  formed  on  a  basis  of  $100,000,  di- 
vided into  1000  shares  of  the  par  value  of  $100  each,  fully  sub- 
scribed ;  the  stock  is  to  be  paid  for  in  equal  instalments  of  $10 
each  per  share  until  fully  paid;  what  are  the  opening  entries? 

First  Method . 

592.  Treat  as  outlined  in  mining  set  of  books  in  Chapter  X. 

Second  Method; 

593.  Dr.  Cash  Book.  Cr. 


To  Capital  Stock $10,000.00 

1st  Instalment  of  10  per 
cent,  per  Instalment 
Book  pg 


Third  Method . 

594.     Instalment  Account  No.  i        $10,000 

To  Capital  Stock  $10,000 

For  first  instalment  of  10  per  cent,  etc. 

After  which  credit  Instalment  Account  No.  i  through  the 
Cash  Book  as  fast  as  the  instalment  payments  are  made. 


AND   CORPORATION   LAW  235 

Fourth  Method. 

595.  Debit  ten  instalment  accounts  for  10  per  cent  of  the 
Capital  Stock,  and  credit  Capital  Stock  account  for  "100  per 
cent;  then  treat  each  instalment  account  as  explained  in  third 
method. 

Fifth  Method. 

596.  Subscribed  Capital  Dr.  $100,000 

To  Capital  Stock  $100,000 

Capital  Stock  fully  subscribed. 

596  (a).  Then  credit  Subscribed  Capital  for  future  pay- 
ments, as  shown  by  the  Instalment  Book,  writing  on  the  credit 
side  of  this  account  the  instalments  in  the  order  of  their  num- 
ber until  the  account  balances. 

Note :  These  entries  can  only  be  made  where  the  stock  is 
all  subscribed  for. 


CHAPTER  XIII. 


Paying  for  an  Oil  Claim  Partly  in  Stock,  Partly  in  Cash, 
and  Agreeing  to  Pay  a  Royalty  on  All  the  Oil  Produced — An 
Issue  of  Preferred  Stock  and  Common  Stock  Authorized — 
Only  Preferred  Stock  Issued  at  the  Outset — Accounting  for 
the  Royalty  and  Premium — Four  Different  Methods  of  Open- 
ing the  Books — Paying  a  Dividend  on  "Preferred"  and  "Com- 
mon" Stock  and  Creating  a  Reserve  Fund — Decreasing  Capital 
Stock  and  Reducing  Preferred  Stock  to  Common  Stock. 


597.  Smith  and  Jones  own  an  old  claim  in  a  well  known 
oil  district,  but  they  have  not  sufficient  capital  with  which  to 
develop  their  claim ;  they  wish  to  form  a  company  for  this  pur- 
pose, and  they  interest  several  of  their  friends  in  their  plan, 
which  is  as  follows :  They  propose  to  organize  a  company  on 
a  basis  of  $200,000,  divided  into  20,000  shares  of  $10  each, 
10,000  shares  of  which  are  to  be  preferred  stock  and  the  re- 
maining 10,000  shares  common  stock.  The  preferred  stock  is 
to  be  8  per  cent  preferred  and  is  also  to  participate  equally  in 
the  dividends  paid  on  the  common  stock.*  These  inducements 
are  offered  to  the  purchasers  of  preferred  stock  in  order  to 

*Vi(ie  paragraph  299. 


236  CORPORATION    ACCOUNTING 

place  it  quickly  and  acquire  money  for  operating  purposes  at 
once.*  Smith  and  Jones  are  to  receive  for  their  claim  $10,000 
cash,  $50,000  in  preferred  stock  and  a  royalty  of  20  cents  a 
barrel  on  the  product  of  the  wells,  payable  quarterly.  The 
10,000  shares  of  common  stock  are  to  be  placed  in  the  Treas- 
ury, so  called,  to  be  sold  for  the  purpose  of  creating  additional 
working  capital,  should  further  capital  be  required.  The  pre- 
ferred stock  is  to  be  sold  for  spot  cash.  What  are  the  opening 
and  subsequent  entries  ? 

598.  When  a  permanent  organization  is  effected,  Smith 
and  Jones  assign  their  claim  to  the  company,  after  which  the 
instrument  of  assignment  is  properly  recorded  or  filed  in  the 
Recorder's  office.  A  resolution  is  then  introduced  at  the  di- 
rectors meeting,  wherein  they  resolve  to  purchase  this  certain 
claim  from  Smith  and  Jones  for  the  consideration  before  speci- 
fied.   Then  the  following  entry  is  made  in  the  Journal : 

First  Method. 

599.  Oil  Claim  Dr.  to  Sundries  $60,000 

Preferred  Capital  Stock  $50,000 

Smith  &  Jones  $10,000 

For  5000  shares  of  preferred  stock  at  $10  per  share,  and 
$10,000  to  be  paid  in  cash  to  Smith  and  Jones  for  their  title 
and  interest  in  a  certain  oil  claim  as  per  articles  of  assignment. 

599  (a).  Note:  The  name  of  the  above  debit  account  can 
be  varied,  such  as  Wells,  Plant,  Real  Estate,  or  any  other  ap- 
propriate or  suggestive  name. 

600.  When  the  balance  of  the  preferred  stock  is  subscribed 
for,  the  following  entry  may  be  made : 


Sundries  Dr. 

Subscription  Account 

$50,000 

White,  1000  shares 

$10,000 

Black,   1000  shares 

$10,000 

Brown,  1000  shares 

$10,000 

Gray,  1000  shares 

$10,000 

Green,  1000  shares 

$10,000 

Treasury  Stock 

$100,000 

For  10,000  shares  of  stock  placed 

in  the  Treasury. 

To  Preferred  Capital  Stock 

$  50,000 

To  Capital  Stock 

$100,000 

^Vide  paragraph  292. 


AND   CORPORATION   LAW  237 

6oi.  When  the  subscriptions  are  all  paid,  the  Subscription 
Account  or  Subscribed  Capital  Account  will  balance,  and  the 
Treasury  Stock  Account  will  represent  the  unsubscribed  stock 
of  the  company.  The  unsubscribed  stock  of  a  company  is  so 
generally  referred  to  as  Treasury  Stock  that  the  term  is  used 
in  that  sense  here.  It  must  be  said,  however,  that  the  term 
is  inexact  and  inappropriate.  The  unsubscribed  stock  of  a 
company  (if  it  appears  on  the  financial  books  of  the  company 
at  all)  should  appear  under  the  heading  "Unsubscribed  Stock." 
There  is  no  ambiguity  nor  equivocation  in  this  latter  term.  It 
can  convey  only  one  meaning  and  that  the  true  one. 

602.  Two  stock  accounts  have  been  opened  in  the  General 
Ledger,  because  it  is  better,  though  not  necessary,  that  the  pre- 
ferred stock  and  the  capital  stock  should  be  kept  separate  in 
this  ledger.  It  is'  strictly  necessary,  however,  to  keep  them 
separate  in  the  Stock  Ledger. 

603.  The  foregoing  entries  show  Oil  Claim  debited  for  the 
amount  it  cost  the  company  in  stock  and  cash;  show  the 
amount  still  due  Smith  and  Jones  on  their  assignment;  show 
Preferred  Capital  Stock  credited  for  the  full  amount  of  pre- 
ferred stock,  and  Capital  Stock  credited  for  the  full  amount  of 
common  stock;  show  Subscription  Account  debited  for  the 
full  subscription,  with  the  names'  and  amount  for  which  each 
one  has  subscribed ;  and  show  Treasury  Stock  debited  for  the 
amount  of  stock  unsubscribed,  and  finally  show  the  books  in 
balance.  As  soon  as  the  money  is  received  on  subscriptions, 
Smith  and  Jones'  are  paid  $10,000,  which  balances  their  ac- 
count, and  the  company  has  $40,000  left  for  development  pur- 
poses. 

Second  Method. 

604.  First  Entry. 

Oil  Claim  Dr.  $60,000 

To  Smith  and  Jones  $60,000 

For  that  certain  oil  claim,  etc.,  to  be  paid  for  in  5000  shares 
of  preferred  stock  at  $10  per  share,  and  $10,000  to  be  paid  in 
cash. 

605.  Second  Entry. 

Smith  and  Jones  Dr.  $50,000 

To  Preferred  Capital  Stock  $50,000 

For  5000  shares  of  preferred  stock  issued  in  part  payment 
for  their  claim. 


238  CORPORATION   ACCOUNTING 

This  leaves'  a  balance  of  $10,000  in  their  account  which  is 
to  be  paid  in  cash. 

606.  Third  Entry. 

Subscribed  Capital  $50,000 

To  Preferred  Capital  Stock  $50,000 

(With  names  and  explanations) 

607.  Fourth  Entry. 

Unsubscribed  Stock  $100,000 

To  Capital  Stock  $100,000 

(With  explanation) 

As  soon  as  the  subscriptions  are  paid  the  Subscription  Ac- 
count will  balance,  and  then  Smith  and  Jones  are  paid  $10,000, 
which  balances  their  account. 

Third  Method. 

608.  Sundries  Dr. 

Oil  Claim  $  60,000 

Subscription  Account  50,000 

Treasury  Stock  (unsubscribed)  100,000 
To  Sundries  Credit 

Smith  and  Jones  $  10,000 

Preferred  Capital  Stock  100,000 

Capital  Stock  100,000 

609.  Smith  and  Jones  assign  all  their  right,  title  and  in- 
terest in  and  to  that  certain  oil  claim,  etc.,  in  consideration  of 
the  issuance  to  them  of  $50,000  full  paid  preferred  stock  of  this 
company,  the  payment  of  $10,000  cash,  and  a  royalty  of  20 
cents  a  barrel  on  all  the  oil  produced  from  this  claim.  The  re- 
maining $50,000  preferred  stock  is  subscribed  as  follows :  (here 
name  subscribers)  and  the  balance  $100,000  common  stock  is 
placed  in  the  Treasury. 

610.  Credit  Subscription  Account  with  payment  on  Sub- 
scription, out  of  which  pay  Smith  and  Jones  $10,000  cash,  clos- 
ing these  two  accounts. 

Fourth  Method. 

611.  Same  as  any  one  of  the  other  three,  with  the  excep- 
tion that  no  account  is  opened  for  the  unsubscribed  common 
stock.     As  this  stock  is  sold,  debit  cash  and  credit  Capital 


AND   CORPORATION   LAW  239 

Stock.  If  subscribed  for  to  be  paid  later,  debit  Subscription 
Account,  or  Subscribers  Account,  or  Subscribed  Capital, 
whichever  you  prefer  to  call  it. 

612.  A  preamble  something  like  the  following  should  pre- 
cede the  opening  entry. 

612  (a).     The  Gusher  Oil  Co.  incorporated  under  the  laws 

of on  the day  of ■. .  .  .190.  ., 

with  an  authorized  Capital  of  $200,000,  divided  into  20,000 
shares  of  the  par  value  of  $10  each — 10,000  shares  of  which  are 
8%  preferred,  and  10,000  shares  common  stock — has  this  day 
been  organized  and  commenced  business  as  follows : 

613.  We  will  presume  that  at  the  end  of  the  first  quarter 
the  wells  have  produced  10,000  barrels  of  oil,  and  Smith  and 
Jones  are  entitled  to  a  royalty;  what  is  the  entry? 

Royalty  Account  $2,000 

To  Smith  and  Jones  $2,000 

For  royalty  of  20  cents  a  barrel  on  10,000  barrels  of  oil. 

613  (a).  Or  if  the  royalty  is  paid  at  once  it  is  best  to  make 
the  entry  through  the  Cash  Book  direct  to  Royalty  Account. 
When  it  is  not  paid  at  once  the  entry  should  be  made  through 
the  Journal  so  that  the  books  may  show  the  company's  obli- 
gations. 

614.  The  questions  may  be  asked :  What  shall  we  do  with 
Royalty  Account  at  the  close  of  the  fiscal  period?  Is  it  a  Cap- 
ital  or  a  Revenue  Expense  ?  Do  we  not  pay  so  much  in  stock 
and  so  much  in  cash  for  the  claim  we  purchased,  and  is  not 
the  royalty  a  further  part  of  the  purchase  price ;  and  being  a 
part  of  the  purchase  price,  should  we  not  charge  it  to  Capital 
Expense  or  Investment,  instead  of  to  Revenue  Expense  or 
Profit  and  Loss  ?  The  answer  is,  it  is  a  Revenue  Expense,  and 
should  be  charged  to  Profit  and  Loss ;  and  the  reason  is  this : 
The  payment  of  the  royalty  is  contingent  on  the  claim  pro- 
ducing oil,  and  as  the  oil  produced  is'  a  source  of  revenue  to  us, 
every  expense  connected  with  its  production  is  a  Revenue  Ex- 
pense.* Now  this  expense  is  directly  connected  with  the  pro- 
duction of  revenue,  for  it  exists  only  by  virtue  of  us  having  a 
revenue.  It  is  simply  a  case  of  no  revenue,  no  royalty.  This 
same  doctrine  holds  true  of  all  royalties. 

Selling  Stock  at  a  Premium. 

615.  At  the  end  of  six  months  the  $40,000  having  been 
spent  in  developing  their  claim,  purchasing  machinery  and  ex- 

*Vide  paragraph  407. 


240  CORPORATION    ACCOUNTING 

tending  the  scope  of  their  enterprise,  the  directors  decide  by 
resolution  to  sell  $10,000  worth  of  Unsubscribed  Stock  for  the 
purpose  of  sinking  another  well,  and  for  other  purposes.  They 
have  struck  oil,  their  prospects  are  good,  and  they  have  no 
trouble  in  placing  the  stock  at  a  premium  of  25  per  cent.  What 
are  the  entries  ? 

First  Method. 

616.      Sundries  Dr. 

Subscription  Account  $10,000 

Stockholders  2,500 

To  Sundries  Cr. 
Treasury     Stock     (unsub- 
scribed stock)         '  $10,000 
Stock  Premium  2,500 

For  1000  shares  of  unsubscribed  or  treasury  stock  sold  at  a 
premium  of  25  per  cent  to  the  following  subscribers,  per  reso- 
lution of  the  Board  of  Directors,  adopted 190. . . 

(Here  give  the  names  of  subscribers  and  the  amount  for 
which  each  one  has  subscribed.) 

Second  Method. 

618.  Sundries  Dr. 

Subscribers  Account  $10,000 

Accruing  Premium  2,500 

To  Sundries  Cr. 

Unsubscribed  Stock  $10,000 

Premium  2,500 

For  1000  shares  of  common  stock  sold  at  a  premium  of 

25%,  per  Minute  Book  page See  Subscription  Book 

or  Stock  Journal  for  names  of  subscribers. 

619.  Then  write  the  names  of  subscribers  and  amounts  in 
Petty  Ledger*  form  on  Subscribers  Account,  and  also  on  Ac- 
cruing Premium  Account,  crediting  both  these  accounts 
through  the  Cash  Book  as  payments  are  made. 

Third  Method. 

620.  Make  no  Journal  entry,  but  when  the  subscribers  pay 
for  their  stock  make  the  following  entries  in  the  CasH  Book: 

*Vide  paragraph  542. 


AND   CORPORATION   LAW  241 

Cash  Book. 


Treasury    Stock $10,000.00 

For  1,000  shares  of  Treasury 
stock  sold  at  a  premium 
of  25  per  cent,  as  per  reso- 
lution, etc.,  to  the  follow- 
ing subscribers: 

(Here  give  the  names) 

Stock    Premium    Account ...  $2,500 
For  25  per  cent  premium  on 
1,000    shares   of   Treasury 
stock  as  above. 


.    .  J 
Creating  Reserve  Fund.* 

621.  At  the  end  of  the  first  year  the  books  of  the  company 
show  a  gain  on  the  Profit  and  Loss  Account  of  $22,000,  an 
amount  equal  to  20  per  cent  on  the  outstanding  stock  of  the 
company,  thereupon  the  directors  declare  a  dividend  of  10  per 
cent  on  the  preferred  stock,  and  a  dividend  of  3  per  cent  on  the 
preferred  and  common  stock,  and  order  $2500  placed  in  a  Re- 
serve Fund;  the  balance  to  remain  in  Surplus  Account;  what 
are  the  entries  ? 

First  Method. 

622.  First  Entry. 

Profit  and  Loss  Dr.  $10,000 

To  Preferred  Dividend  No.  i         $10,000 
For  dividend  of  10  per  cent  on 
$100,000  Preferred  Stock. 

623.  Second  Entry: 

^oss  Dr.  $12,000 

ries 


Profit  and  Loss  Dr.  $12,000 

To  Sundries 

Dividend  No.  i 
For  dividend  of  3  per  cent  on 
$110,000  preferred  and  com- 
mon stock. 

Reserve  Account  $2,500 

Surplus  Account  $6,200 

For  balance  of  net  gain.  All 
as  per  resolution  of  Board  of 
Directors  adopted 


^Vide  paragraph  391. 


242  CORPORATION    ACCOUNTING 

624.  Third  Entry : 

Reserve  Fund  Dr.  $2,500 

To  Cash  $2,500 

625.  This  entry  is  made  in  the  Cash  Book  and  estabHshes 
the  Reserve  Fund  by  actually  withdrawing  it  out  of  the  Cash 
and  investing  it.*  The  Reserve  Account  remains  open  on  the 
books  as  the  corresponding  and  counterbalancing  Account  of 
the  Reserve  Fund.  The  Dividend  Accounts  are  closed  by 
the  payment  of  the  dividends. 

Second  Method. 

626.  Profit  and  Loss  Dr.  $22,000 

To  Sundries 

Preferred  Dividend  No.  i  $10,000 

Dividend  No.  i  3,300 

Reserve  Account  2,500 

Surplus  Account  6,200 

(With  proper  explanations). 

This  method  creates  a  ''Reserve  Account"  instead  of  a  "Re- 
serve Fund" ;  no  part  of  the  assets  being  withdrawn  from  the 
business,  but  merely  held  out  of  the  Surplus. — Vide  paragraph 
389. 

Reducing  Preferred  to  Common  Stock.* 

627.  At  the  end  of  the  second  year  the  company  is  in  a 
still  more  prosperous  condition,  and  the  directors  desire  to 
reduce  the  capital,  so  that  the  capital  of  the  company  may  be 
fully  paid  up ;  they  also  desire,  for  some  reason,  to  reduce  the 
preferred  stock  to  common  stock,  so  that  all  the  stock  may  be 
of  one  kind  and  that  it  all  may  share  equally  in  the  profits ;  the 
percentage  to  be  limited  only  by  the  profits  of  the  company 
and  the  wisdom  of  the  directors  in  maintaining  a  sufficient 
Reserve  Fund  to  meet  unforseen  reverses  or  casualties ;  what 
are  the  entries? 

628.  Capital  Stock  Dr.  $90,000 

To  Treasury  Stock 

(unsubscribed)  $90,000 

Capital  Stock  reduced  as  per  vote  of  stockholders.  Minute 
Book,  page 

*Vide  paragraph  295. 

*iVide  paragraphs  389  and  391. 


AND   COKPORATION   LAW  243 

629.  This  entry  balances  the  Treasury  Stock  or  Unsub- 
scribed Stock  Account  and  reduces  the  Capital  Stock  Account 
to  $10,000. 

630.  Second  Entry. 

Preferred  Capital  Stock  Dr.  $100,000 

To  Capital  Stock  $100,000 

Preferred  capital  stock  reduced  to  common  stock,  per  reso- 
lution, etc. 

631.  This  entry  closes  the  Preferred  Capital  Stock  Ac- 
count, and  the  Capital  Stock  Account  now  stands  xredited  with 
$110,000,  which  represents  the  full  paid-up  capital;  and  the 
nominal  capital  is  now  the  actual  capital  of  the  company.  The 
old  preferred  and  common  stock  certificates  are  surrendered, 
and  new  ones  are  issued  showing  the  new  capitalization.  The 
Treasury  Stock  Account  in  the  Stock  Ledger  is  now  closed 
into  the  Capital  Stock  Account;  also  the  Preferred  Capital 
Stock  Account,  and  the  transaction  is  complete. 

632.  Note  I :  All  stock  certificates  other  than  common 
stock  have  designated  on  their  face  the  particular  kind  of 
stock  they  represent.* 

633.  Note  2:  The  Subscription  Account  should  have 
written  on  the  debit  side  the  names  of  all  the  subscribers  and 
the  amounts  of  their  subscriptions.  As  they  pay  their  sub- 
scriptions they  are  credited  opposite  their  names,  and  in  this 
way  the  Subscription  Account  will  show  those  who  have,  and 
who  have  not  paid ;  and  when  they  have  all  paid,  it  will,  as 
previously  stated,  balance.  Instalment  Accounts  may  be 
treated  in  the  same  way  provided  the  names  are  not  too  nu- 
merous. 

*Vide  paragraph  298. 


CHAPTER  XIV. 

Issuing  Stock  in  Full  Payment  for  Property — Selling  Stock 
at  a  Discount  to  Raise  Working  Capital — A  Dissertation  on 
Discounted  Stock — What  to  Do  With  the  Discount — What 
Constitutes  Paid-up  Stock — Over  Capitalization  a  Weakness 
— Paying  a  Stock  Dividend — Paying  the  Discount  Out  of 
Profits — Paying  for  Water  Rights  in  Stock — The  Requisites 
and  Functions  of  a  Public  Accountant. 


634.  Black  and  White  own  an  oil  claim  and  they  propose 
to  organize  a  stock  company  to  develop  it.  It  is  to  be  one  of 
those  popular  companies,  and  the  stock  is  to  be  placed  so  low 
that  there  can  be  none  so  poor  as  to  be  unable  to  speculate  in 
it.  The  company  is  to  be  organized  on  a  basis  of  $200,opojdi- 
vided  into  20,000  shares  of  the  par  value  of  $10  each.  The 
promoters  are  to  receive  10,000  shares  of  paid-up  stock  for 
th^r  claim,  5000  shares  are  to  be  sold  at  50  per  cent  of  the  par 
value  to  create  a  ''Working  Capital"  of  $25,000,  and  the  re- 
maining 5000  shares  are  to  be  held  by  the  company ;  what  are 
the  entries? 

First  Method. 

635.  First  Entry : 

Oil  Claim  Dr.  $100,000 

To  Capital  Stock  $100,000 

For  10,000  shares  of  stock  of  the  par  value  of  $10  per  share 
issued  to  Black  and  White  for  assignment  of  their  title  and  in- 
terest in  a  certain  oil  claim  to  this  company  and  deed  to  which 
is  on  file  and  of  record  in  the  office  of  the  County  Recorder,  etc 

636.  Second  Entry: 

Unsubscribed  Stock   Dr.  $50,000 

To  Capital  Stock  $50,000 

For  5000  shares  of  stock  reserved  for  the  future,  per  Ar- 
ticle  of  the  by-laws. 


AND   CORPORATION   LAW  246- 

637.    ,Third  Entry. 

Subscribers  Account  Dr 


To  Capital  Stock 


638.  Then  debit  subscribers  and  credit  Capital  Stock  for 
future  subscriptions,  posting  the  totals  at  the  end  of  the  day, 
the  end  of  the  month,  or  the  foot  of  each  page  as*  desired.*  If  a 
Stock  Ledger  is  kept  with  money  columns,  each  stockholder 
may  be  debited  for  the  par  value  of  his  subscription ;  and  as  the 
subscriptions  are  paid  credit  Subscribers  Account  from  the 
Cash  Book,  and  also  individual  stockholders  accounts  in  the 
Stock  Ledger  by  a  single  entry.  When  all  subscribers'  have 
paid,  the  Subscribers  Account  will  show  50  per  cent  paid,  and 
the  stockholders  accounts  in  the  Stock  Ledger  will  show  that 
they  have  paid  50  per  cent  of  par  for  their  stock.  If  the 
stock  set  aside  for  sale  should  not  all  be  sold,  and  it  is  desired 
to  have  the  Capital  Stock  Account  show  the  full  capital,  an. 
entry  like  this  may  be  made  for  the  balance : 


639.  Unsubscribed  Stock  Dr.  $ 

To  Capital  Stock  $.  . . . 

for  balance  of  unsubscribed  stock. 

Second  Method. 

640.  First  and  second  entries  same  as  foregoing. 

641.  Third  Entry. 

Subscribers  (by  name)     Dr.  $ 

To  Capital  Stock  $ 


641  (a).  That  is,  debit  each  subscriber  individually  in 
Petty  Ledger  form  for  his  subscription,  and  credit  Capital 
Stock  in  one  amount  for  total  subscription.  Credit  payments 
opposite  names  and  this  will  show  a  balance  of  50%  on  each 
subscription. 

Third  Method. 

642.  Have  a  Cash  Book  ruled  with  a  special  column 
headed  "Capital  Stock."  Whenever  stock  is  sold  and  paid  for, 
the  amount  is  entered  in  this  column,  with  proper  explanation,, 
and  the  total  is  posted  to  the  credit  of  Capital  Stock  Account 
at  the  end  of  the  month. 

*Vide  Journal  page  227. 


246 


643- 


COKPORATION    ACCOUNTIisG 
Form  of  Cash  Book — Debit  Side. 


Date 
1905 

Name 

Particulars 

Capital 
Stock 

FoL 

Miscellaneous 

Total 

Oct.  1 

A.  Smith 

B.  Jones 

50%  on  20  Stiares 

50%  on  10  Shares 

Posted  to  Cap. 
Stock 

100 
50 

oo 

00 
00 

150 

Subsequent  Entries. 

644.  The  foregoing  entries  open  the  books,  but  show  that 
there  is  50%  due  on  all  subscriptins ;  and  how  to  dispose  of 
this  and  show  the  stock  all  paid  for  is  the  next  problem  that 
confronts  us.  The  following  entry  will  dispose  of  the  balance 
on  subscriptions,  as  far  as  the  mere  bookkeeping  of  it  is  con- 
cerned. 

645.  Rebate  or  Commission 

or  Discount  Dr.  $ 

To  Subscribers  Account  $ 

For  50%  rebate  or  discount  on thousand  shares  of 

-stock,  as  per  Article of  the  By-Laws. 

645  (a).  If  individual  accounts  were  debited  instead  of 
'Subscribers  Account  of  course  the  entry  would  have  to  be 
varied. 

646.  The  trouble  with  this  entry  is  that  it  does  not  dispose 
of  the  balance ;  it  merely  shifts  the  debit  balance  from  the  sub- 
scribers account  to  a  nominal  account;  and  the  question  re- 
mains, "what  are  we  going  to  do  with  this  when  we  make  up 
a  statement  or  balance  sheet?"  It  is  an  elementary  lesson  in 
bookkeeping  that  all  debit  balances  are  either  assets  or  losses ; 
and  as  a  rebate  or  discount  can  not  possibly  be  an  asset,  it 
must  be  a  loss;  hence  we  have  an  immense  loss  to  wipe  out, 
and  if  we  close  this  into  Profit  and  Loss  we  shall  probably 
show  an  insolvency.  In  any  case  it  will  cut  down  profits,  and 
as  dividends  can  only  be  legally  paid  out  of  profits,  this  must 
be  figured  out  of  profits  before  a  dividend  can  be  paid.  Some 
companies  dare  to  carry  this'  account  on  their  books  and  state 
it  as  an  asset,  under  some  fancy  name  such  as  contingencies, 
franchise,  or  other  cloudly  title;  but  Auditors  should  frown 
upon  this  practice  and  report  the  true  nature  of  it.  There  is 
another  side  to  this  question  for  the  favored    stockholder   to 


AND   CORPORATION   LAW  24T 

consider.  He  can  only  pay  for  his  stock  by  paying  for  it,  and 
no  mere  trick  in  bookkeeping  can  make  his  stock  paid-up,  as  ta 
creditors.  All  by-laws  bind  or  release,  constrain  or  liberate 
only  in  as  far  as  they  conform  to,  and  are  consistent  with  the 
State  laws ;  and  the  stockholders  are  liable  to  the  creditors  of 
a  company  for  the  difference  between  the  par  value  of  the 
stock  and  what  they  paid  for  it.  This  thing  of  stock  discount 
has  been  carried  to  an  absurd  extreme;  cases  are  common  all 
over  this  state  where  dollar  stock  has  been  sold  for  lo  cents. 
It  has  been  simply  used  as  a  bait  to  catch  the  unwary  and 
many  of  the  precipitate  purchasers  have  found  themselves 
loaded  up  with  cheap  stock  on  which  they  had  to  pay  assess- 
ments, or  perhaps  do  the  wiser  thing  of  letting  go  what  was 
lost,  instead  of  sending  good  money  after  it  in  the  foolish  ex- 
pectancy of  bringing  it  baek. 

647.  The  natural  inference  to  be  drawn  from  an  offer  to- 
sell  stock  at  a  discount  is  that  the  incorporators  have  set  a 
value  on  the  property  they  have  turned  into  the  corporation,, 
from  two  to  ten  times  its  worth. 

648.  Now  let  us  suppose  a  time  when  the  Surplus  Account 
stands  credited  with  a  balance  of  $10,000  and  the  unsubscribed 
stock  is  still  debited  with  $50,000,  and  the  directors  decide  to 
balance  the  Surplus  Account  by  declaring  a  stock  dividend*  of 
$5000  and  a  cash  dividend  of  $5000 ;  what  are  the  entries  ? 

649.  First  Entry. 

Surplus  Account  Dr.  $5,000 

To  Unsubscribed  Stock  $5,ooo 

For  500  shares  of  stock  issued  pro-rata  to  the  stockholders 
as  a  stock  dividend,  per  resolution  of  the  Board  of  Directors, 
etc. 

650.  After  this',  issue  the  stock  pro-rata  to  the  stockholders 
and  make  the  proper  entries  in  the  Stock  Ledger. 

651.  Second  Entry. 

Surplus  Account  Dr.  $5,000 

To  Dividend  Account  $5,ooo 

For  cash  dividend  of  one-third  of  i  per  cent  on  the  sub- 
scribed capital. 

652.  As  the  cash  dividends  are  paid,  debit  Dividend  Ac- 
count through  the  Cash  Book. 

*Vide  paragraph  497.  li^L.i.i.  1 


248  CORPORATION    ACCOUNTING 

653.  These  two  entries  could  be  made  in  one  resultant 
entry  thus : 

Surplus   Account  Dr.  $10,000 

To  Unsubscribed  Stock  $5,ooo 

To  Dividend  Account  $5,ooo 

(With  proper  explanations). 

Rebate  or  Discount 

654.  Some  companies  insist  on  carrying  the  Rebate  or 
Discount  Account  (or  whatever  account  represents  the  differ- 
ence between  the  par  value  of  the  stock  and  the  price  it  was 
sold  for)  as  an  asset  on  the  books.  In  this  case  50  per  cent  of 
$5000  is  allowed  to  stand  on  the  books  as  a  resource,  until  such 
time  as  the  Profit  and  Loss  Account  or  Surplus  Account  has  a 
sufficient  credit  balance  to  wipe  it  out,  after  which  the  Capital 
.Stock  Account  represents  the  actual  instead  of  the  nominal 
capital  of  the  company.  The  following  is  the  entry  to  make 
ior  this  purpose : 

655.  Profit   and    Loss    or    Sur- 
plus Account  Dr.  $25,009 

To  Rebate  or  Discount 

Account  $25,oo(^ 

(or  as  much  of  it  as  the  earnings  will  stand  for  is  wiped  out 
each  year.) 

656.  Now  there  is  nothing  to  be  gained  by  this  method  of 
selling  stock  at  a  discount.  The  company  can  not  pay  a  divi- 
dend until  it  has  earned  enough  to  pay  the  discount.  The 
stockholders  liability  exists  up  to  the  full  payment  of  the  stock, 
and  the  company's  earnings  as  compared  with  its  actual  cap- 
ital, are  much  greater  than  when  compared  with  its  nominal 
capital;  and  if  the  company  can  earn  a  maximum  revenue  on 
the  smaller  capitalization,  there  is  no  apparent  reason  for  in- 
creasing that  capitalization ;  and  if  it  is  desired  to  let  the  earn- 
ings accumulate,  it  looks  better  and  sounds  better  to  have 
them  appear  as'  a  surplus ;  therefor  it  is  better  to  sell  half  the 
number  of  shares  of  stock  at  twice  the  price,  than  twice  the 
same  number  of  shares  at  half  the  price.  It  may  be  said  that 
on  the  larger  capitalization  the  company's  creditors  have  a 
larger  measure  of  protection,  and  that  the  company's  position 
is  strengthened  thereby;  this  is  only  a  half  truth.  Over  capi- 
talization is  a  weakness.  It  is*  the  company's  surplus  that 
really  gives  it  strength.  It  is  the  fact  that  it  is  a  paying  con- 
cern that  gives  it  stability  and  permanency  on  which  to  base 
a  credit;  and  it  is  the  dividend  earning  capacity  of  the  stock. 


AND   CORPORATION   LAW  249 

coupled  with  the  stability  of  the  company,  that  gives  its  stock 
a  value ;  and  if  a  company  is  over  capitalized  the  dividends  on 
the  larger  capitalization  will  necessarily  be  small,  and  each 
share  of  stock  will  have  a  smaller  claim  on  the  surplus  assets 
of  the  company. 

657.  There  is  one  reason  for  selling  this  first  issue  of 
stock  at  a  discount,  and  it  is  at  least  a  questionable  reason. 
The  promoters  get,  or  take,  their  own  stock  at  a  fraction  of  its 
par  value.  They  let  in  the  first  batch  of  purchasers  at  50%  of 
the  par  value,  and  they  expect  to  get  100%  from  subsequent 
purchasers.*  Now  let  us  see  how  this  works  out,  supposing 
that  the  incorporators'  got  their  $100,000  of  stock  at  50%  by 
setting  a  double  value  on  their  claim,  and  that  the  first  pur- 
chasers got  their  $50,000  of  stock  at  50%,  and  the  remaining 
$50,000  of  stock  was  sold  at  par.  The  last  purchasers  would 
have  paid  $25,000  too  much  on  the  real  basis  of  value.  Sup- 
pose now  that  the  company  was  suddenly  thrown  into  insol- 
vency (it  is  insolvent)  and  that  in  the  wind-up  the  company 
had  but  this  $50,000  left  for  distribution  among  its  stockhold- 
ers; these  last  stockholders  would  have  a  claim  to  one-fourth 
of  this,  since  they  own  one-fourth  of  the  stock.  They  would 
receive  $12,500,  the  others  $37,500.  In  other  words,  the  pro- 
moters and  first  purchasers  would  get  back  50%  of  their  actual 
investment,  and  the  last  ones,  (those  who  made  even  this  pos- 
sible) would  get  back  but  25%.  Suppose  again,  that  the  com- 
pany went  on  and  prospered,  it  would  have  to  earn  $25,000 
(equal  to  the  stock  discount)  before  it  would  be  even  solvent. 
If  it  did  not  have  this  deficit  to  make  up  it  would  have  $25,000 
possibly  available  for  dividends.  Of  this  $25,000  the  last  pur- 
chasers (on  the  basis  of  their  holdings)  would  be  entitled  to 
$6250.  Oh  the  basis  of  their  contribution  to  the  real  paid-up 
capital  they  would  be  entitled  to  two-fifths  or  $10,000;  and  still 
there  is  not  a  cent  coming  yet.  Let  us  go  on  until  they  have 
earned  another  $25,000  for  dividends.  Of  this  they  get  one- 
fourth  or  $6250;  by  right  of  their  contribution  to  the  original 
capital  they  should  get  $10,000 ;  here  again  they  lose  $3750  or 
7K%  01^  their  investment,  which  the  others  make.  Putting 
it  in  another  way,  suppose  the  company  pays  a  dividend  of  5% 
on  its  nominal  capital,  that  would  be  $10,000.  If  it  paid  the 
same  amount  on  the  basis  of  its  actual  capital  it  would  amount 
to  8% ;  here  the  purchasers  at  par,  lose  3% ;  and  so  it  goes, 
they  lost  money  at  the  start,  they  lose  on  every  dividend,  and 
they  lose  in  liquidation ;  because  then  nominal  values  shrink 
to  actual  or  intrinsic  values. 

*Vide  chapter  XXVn. 


250  CORPORATION    ACCOUNTING 

658.  No  set  of  promoters,  with  an  elementary  knowledge 
of  the  principles  of  moral  philosophy,  will  thus  rob  the  unwary 
purchaser,  and  they  will  not  attempt  to  excuse  or  defend  this 
practice;  and  yet  when  these  same  people  are  victimized  by  a 
dishonest  bookkeeper  or  other  trusted  employee,  they  will  vir- 
tuously denounce  him  as  a  rascal  and  moral  pervert,  closing 
their  eyes  to  the  obvious  fact  that  they  themselves  set  him  an 
example  in  the  practice  of  fraud,  duplicity  and  mendacity.  In 
an  age  when  embezzlement  and  defalcation  are  so  common 
and  so  menacing,  employers  can  not  be  too  careful  in  setting 
up  a  standard  of  business  integrity  and  morality  for  the  ex- 
ample and  emulation  of  their  trusted  employes ;  for  inasmuch 
as  the  creature  can  not  be  greater  than  the  creator,  we  need 
not  be  surprised  if  the  servant  is  not  more  honest  than  the 
master. 

659.  This  may  seem  like  a  lot  of  moralizing,  but,  it  is 
dwelt  on  it  at  length  for  the  benefit  of  the  student.  Moral  char- 
acter is  one  of  the  requisites  of  a  public  accountant.  He  must 
be  well  vouched  for  before  he  can  obtain  a  certificate.  It  is  a 
part  of  his  business  to  expose  and  denounce  fraud,  and  he  must 
have  character  and  courage  to  do  it.  His  work  is  synthetic, 
analytic,  inquisitorial,  advisory  and  supervisory,  and  in  addi- 
tion to  his  expert  training  he  must  have  a  keenly  appreciative 
sense  of  his  duties  in  order  to  discharge  them  properly. 

Paying  for  a  Water  Right  in  Stock. 

660.  Suppose  this  company  buys  a  water  right  and  pays 
for  it  in  unsubscribed  treasury  stock ;  what  entries  ? 

661.  First  Entry. 

Water  Right  Dr.  $1,000 

To  Fresno  Canal  Co.  $1,000 

For  twenty  year  water  right,  etc.,  to  be  paid  for  in  treasury 
stock. 

662.  Second  Entry. 

Fresno  Canal  Co.  $1,000 

To  Treasury  Stock  $1,000 

For  100  shares  of  treasury  stock  issued  to  F.  C.  Co.  in  pay- 
ment of  water  right.    Or  one  entry  like  this : 

663.  Water  Right  Dr.  $1,000 

To  Treasury  Stock  $1,000 

For  100  shares  of  stock  issued  to  F.  C.  Co.,  in  payment  for 
water  right. 


AND   CORPORATION   LAW  251 

664.  This  water  right  becomes  as  much  a  part  of  the  as- 
sets' of  the  company  as  anything  they  possess,  and  it  is  to  be 
accounted  for  in  the  same  way  as  franchises,  leaseholds,  etc.* 


CHAPTER  XV. 


Opening  the  Books  of  a  Water  Company  That  Has  Issued 
Its  Entire  Capital  Stock  in  Payment  for  Land  and  Water 
Rights — Receiving  Stock  Donations — Accounting  for  Same — 
Selling  Donated  Stock  at  a  Discount  to  Pay  for  Franchise  and 
Raise  Working  Capital — Three  Methods  of  Opening  the  Books 
— A  Treatise  on  Donated  Stock — How  to  Obtain  a  Franchise — 
How  to  Treat  Forfeited  Stock — Forfeited  Shares  Account. 


665.  The  Springfield  Water  Company  is  incorporated  for 
the  purpose  of  supplying  water  to  the  new  town  of  Springfield. 
Its  capital  stock  is  placed  at  $100,000,  divided  into  5000  shares 
of  the  par  value  of  $20  each.  The  incorporators  are  A.  B. 
Water,  C.  D.  Pumper,  E.  F.  Piper,  G.  H.  Faucett,  I.  J.  Wetter. 
The  understanding  among  themselves  is  that  they  are  to  take 
all  of  the  stock  of  the  company  in  payment  for  the  land  and 
water  rights  which  they  own,  and  which  they  turn  over  to  the 
company  at  the  time  of  its  organization.  They  will  each  do- 
nate to  the  corporation  20%  of  their  stock  as  a  bonus,  to  be 
sold  at  75  cents  on  the  dollar  of  its  par  value,  to  raise  money 
to  purchase  a  franchise  and  supply  a  working  capital.*^  The 
stock  is  to  be  paid  for  in  three  equal  instalments,  and  on  pay- 
ment of  the  third  instalment  paid-up  certificates  are  to  be  is- 
sued to  the  stockholders.  The  franchise  will  cost  the  com- 
pany $5,000.    What  are  the  entries  ? 

First  Method. 

666.  Real  Estate  and  Water 

Rights  Dr.  $100,000 

To  Capital  Stock  $100,000 

For  5000  shares  of  stock  of  the  par  value  of  $20  per  share, 
issued  to  the  incorporators  for  land  and  water  rights,  per  etc. 

*Vide  paragraph  415. 
*2Vide  chapter  XXV. 


252  CORPORATION    ACCOUNTING 

667.  Second  Entry. 

Treasury  Stock  Dr.  $20,000 

To  Working  Capital  $20,000 

For  donation  of  20%  of  the  capital  stock  by  the  incorpor- 
ators, to  be  sold  for  working  capital. 

668.  Third  Entry. 

Subscription  Account        Dr.  $20,000 

To  Treasury  Stock  $20,000 

With  explanations'. 

669.  Fourth  Entry. 

Working  Capital  $5,ooo 

To  Subscription  Account  $5,ooo 

For  discount  of  25%  on  1000  shares  of  treasury  stock. 

670.  The  third  entry  is  not  made  until  the  treasury  stock 
is  sold,  and  the  fourth  entry  is  not  made  until  after  the  75  per 
cent  of  the  par  value  of  the  stock  has  been  paid.  Instalment 
scrip*  is  issued  for  the  first  and  second  payments  and  these  are 
taken  up  and  certificates  issued  when  the  third  instalment  is 
paid.  Opposite  each  subscriber's  name  on  the  Subscription 
Account  is  left  four  Blank  lines  to  admit  of  entering  the  three 
instalments  as  paid,  and  the  fourth  line  is  for  entering  the  dis- 
count; or  if  instead  of  a  Subscription  Account,  individual  ac- 
counts are  opened,  they  are  debited  and  credited  through  the 
Journal  instead  of  the  Subscription  Account. 

Second  Method. 

671.  First  Entry. 

Same  as  first  entry  in  first  method. 

6'J2.     Second  Entry. 

Treasury  Stock  Dr.  $20,000 

I  To  Real  Estate  and 

Water  Rights  $20,000 

For  20%  of  the  purchase  price  of  land  and  water  rights  do- 
nated back  to  the  company,  in  stock,  by  the  incorporators,  to 
be  sold  for  the  benefit  of  the  company.^ 

672  (a).  This  entry  reduces  the  cost  of  the  land  and  water 
rights  to  $80,000. 

*Vide  paragraphs  250  and  251. 
*2Vide  paragraphs  306  et  seq. 


AND   CORPORATION   LAW  253 

673.     Third  Entry. 

Sundries  Dr. 

To  Treasury  Stock  $20,000 

Instalment  Account  No.  i  $5,ooo 

Instalment  Account  No.  2  $5,000 

Instalment  Account  No.  3  $5,ooo 

Rebate  or  Discount  $5,000 

For  1000  shares'  of  treasury  stock  sold  at  a  discount  of  25%, 
and  payable  in  three  equal  instalments. 

673  (a).  Of  course  this  entry  can  only  be  made  where  the 
treasury  stock  is  all  subscribed  for.  Where  it  is  not  all  sub- 
scribed for,  Subscription  Account  or  individual  accounts  are 
debited  for  the  amount  subscribed,  and  the  following  entry 
made  for  the  rebate  or  discount : 

674. 


Rebate  or  Discount            Dr. 

$ 

To  Subscription  or  in- 

dividuals 

John  Jones,  25%  dis.  on  100 

shares  at  $20 

$500 

John  Brown,  25%  dis.  on  50 

shares  at  $20 

$250 

And  so  on. 

Third  Method. 

675.  If  we  examine  closely  into  the  first  two  methods'  we 
will  find  they  are  both  faulty.  In  the  first  method  Real  Estate 
&  Water  Rights  appear  as  having  cost  the  company  $100,000, 
when,  as"  a  matter  of  fact,  they  did  not ;  and  there  is  an  appar- 
ent gain  of  $15,000  to  the  credit  of  Working  Capital  Account. 
In  the  second  method.  Real  Estate  &  Water  rights  appear  as 
having  cost  the  company  $80,000;  when,  in  fact,  tney  cost- the 
company  $85,000,  inasmuch  as  the  donated  stock  only  realized 
$15,000,  and  there  is  a  debit  of  $5000  on  Rebate  or  Discount 
Account  which  has  to  be  wiped  out  by  future  earnings. 

The  best  entries  to  make  are : 

676.  First  Entry. 

Same  as  first  entry  in  preceding  methods. 

677.  Second  Entry. 

Treasury  Stock  Dr.  $20,000 

To  Real  Estate  and 

Water  Rights  $15,000  . 

To  Rebate  or  Discount  5,ooo 


V 


254  CORPORATION   ACCOUNTING 

The  incorporators  donate  back  20%  of  their  stock  (equal 
to  20%  of  the  price  of  Real  Estate  and  Water  Rights),  which 
is  to  be  sold  at  a  discount  of  25%  for  the  purpose  of  raising 
money  with  which  to  commence  business.  See  Minute  Book, 
Page 

678.  Third  Entry.  Same  as  third  entry  in  second  method, 
reference  being  had  to  explanation  following  same. 

679.  This  last  method  shows  that  the  Real  Estate  and 
Water  Rights  cost  just  $85,000;  that  is  $100,000,  less  $15,000 
realized  on  the  donated  stock;  which  is  in  fact  a  discount  of 
$15,000  on  the  purchase  price.  The  rebate  or  discount  is 
wiped  out  and  there  is  no  handicap  at  the  start,  neither  is  there 
a  fictitious  gain  to  fondly  cheat  them  into  the  belief  that  they 
have  made  $15,000  out  of  nothing. 

680.  Some  prefer  to  open  a  Donation  Account  for  the 
amount  donated  to  the  company;  but  inasmuch  as  they  part 
with  the  stock  and  the  company  acquires"  it,  it  becomes  the 
company's  stock  to  be  sold  for  the  benefit  of  the  company's 
treasury;  and  as  the  capital  stock  has  all  been  issued  and  paid 
for,  it  follows  that  this  is  "Treasury  Stock"  and  should  appear 
so  on  the  books.  Some  may  argue  that  as  it  is  a  donation  it 
should  appear  on  the  books  as  a  donation ;  there  is  some  plausi- 
bility in  this,  but  it  is  a  donation  of  what? — stock  of  course; 
and  the  original  entry  on  the  Journal  explains  the  donation; 
but  is  it  really  a  donation?  If  you  buy  an  article  for  $1.00  less 
20%,  you  don't  say  it  cost  you  a  dollar,  you  say  it  cost  you  80 
cents;  and  you  don't  call  the  20  cents  a  donation.  The  incor- 
porators issue  all  the  stock  to  themselves  simply  to  have  the 
capital  fully  paid-up,  and  to  start  out  with  a  surplus  by  means 
of  the  donation ;  but  this  is  such  a  shadowy  surplus  that  it  dis- 
appears like  darkness  with  the  advent  of  light. 

681.  Again,  some  accountants  prefer  not  to  make  any 
entry  of  the  donated  stock  on  the  books  until  it  is  sold,  at 
which  time  a  Working  Capital  Account  is  credited. 

682.  Notwithstanding  some  good  authority  on  these  last 
propositions'  it  is  contended  that,  inasmuch  as  the  company  has 
acquired  5000  shares  of  stock  previously  sold  and  ostensibly 
paid  for,  the  books  of  the  company  should  show  it.  This  kind 
of  treasury  stock  has  some  latent  or  market  value  in  it,  and  to 
this  extent  it  is  an  asset  of  the  company,  and  all  the  assets  of 
the  company  should  appear  on  the  books  of  the  company; 
therefore,  it  is  not  only  good  accounting,  but  it  is  good  practice 
and  good  ethics  that  the  donated  stock  appear  on  the  books. 
This  stock  before  it  was  surrendered  or  donated  back  to  the 


AND    CORPORATION   LAW  255 

company  had  a  20%  interest  in  the  assets  of  the  company,  such 
as  they  were ;  when  it  is*  re-issued  it  again  has  a  20%  interest 
in  the  assets  of  the  company;  and  these  assets  are  increased 
by  just  the  amount  reahzed  on  the  donated  stock,  in  this  case 
$15,000;  and  as  the  capital  HabiHty  has  not  been  increased  by 
the  re-issue  it  follows  that  this'  $15,000  is  a  "capital  gain";  and 
so  if  we  have  opened  a  Working  Capital  Account  as  in  the  first 
method,  and  it  stands  credited  with  $15,000,  we  debit  this  and 
credit  Surplus  Account  when  the  treasury  stock  is  all  sold, 
thus  acquiring  the  desired  $15,000  surplus  at  the  start.  But 
inasmuch  as  the  Real  Estate  and  Water  Rights  have  been 
placed  in  this  instance  on  the  books  at  an  inflated  value,  we 
really  have  no  surplus,  and  the  third  method  is,  strictly  speak- 
ing, the  proper  way  to  open  the  books. 

Obtaining  a  Franchise.*    • 

683.  This'  is  obtained  in  a  circuitous  way.  First  there  is  a 
petition,  then  it  is  advertised  for  sale,  and  then  there  is  an  or- 
dinance passed  granting  it;  after  it  is  passed  it  has  to  be  pub- 
lished a  certain  number  of  times  before  it  becomes  law,  that  is 
before  the  franchise  carries  with  it  the  legal  right  to  operate. 
When  it  is  finally  obtained  and  paid  for.  Cash  is'  credited  and 
Franchise  Account  is  debited  for  the  amount,  and  this  account 
is  treated  as  explained  in  paragraph  415,  Chapter  VIII. 

Forfeited  Stock. 

684.  As  before  stated,  the  stock  is  to  be  paid  for  in  three 
equal  instalments.  Now  suppose  that  the  by-laws  provide 
that  any  subscriber  who  fails  to  pay  his  instalments  within  a 
certain  prescribed  time  shall  forfeit  all  right  and  title  in  and 
to  the  stock  he  has  subscribed  for,  and  all  claim  to  the  money 
he  has  paid  thereon,  and  he  has  subscribed  subject  to  the  by- 
laws; and  suppose  further  that  John  Jones  has  paid  the  first 
instalment  of  25%  of  the  face  value  of  100  shares  of  stock,  and 
failing  to  pay  any  further  instalments  has  forfeited  his  stock 
and  the  money  he  paid,  what  would  be  the  proper  entry  in  this' 
case?*^ 

685.  Treasury  Stock  Dr.  to  Sundries    $2,000 

Instalment  Account  No.  2  $500 

Instalment  Account  No.  3  500 

Rebate  or  Discount  500 

Surplus  Account  500 

For  100  shares  of  stock  forfeited  by  John  Jones  after  pay- 
ment of  first  instalment. 

*Vide  paragraph  415. 

*2Vide  paragraph  302,  sec.  4. 


256  CORPORATION   ACCOUNTING 

686.  The  reason  for  making  this  entry  is  obvioiis.  The 
forfeited  stock*  is  returned  to  the  Treasury.  Instalment  Ac- 
count Nos.  2  and  3  are  credited  for  the  reason  that  there  is 
that  much  less  due  on  them  now. 

687.  Rebate  or  Discount  is  credited  for  the  reason  that  the 
rebate  is  reduced  in  proportion  as  the  subscribed  stock  is  re- 
duced, and  Surplus  Account  is  credited  for  the  reason  that 
the  amount  forfeited  is  a  clear  gain  to  capital.  It  is  credited 
to  Surplus  instead  of  to  Profit  and  Loss  for  the  reason  that  it 
is  a  capital  gain  and  not  a  trading  or  operating  profit.  Rebate 
Account  will  have  a  credit  balance  of  $500  which  will  be  offset 
and  balanced  by  the  rebate  on  the  $2000  Treasury  Stock  when 
it  is  re-sold. 

688.  If  Smith  only  forfeited  his  stock  and  50  per  cent  of 
the  cash  payment,  and  was  to  receive  the  remaining  50  per  cent 
in  paid-up  stock.  Treasury  Stock  would  be  debited  for  87^ 
per  cent  of  the  shares  he  held.  Instalment  Accounts  Nos.  i 
and  2,  and  Rebate  Account  credited  for  25  per  cent  each,  and 
Profit  and  Loss  credited  for  12^/^  per  cent  of  his'  shares*  he 
would  then  have  the  remaining  12^  per  cent  left,  an  amount 
equal  to  50  per  cent  of  the  money  he  paid. 

689.  Such  an  entry  can  be  varied  according  to  conditions. 
For  example  if  this  had  not  been  treasury  stock,  but  the  orig- 
inal issue  of  capital  stock,  and  it  had  been  sold  payable  in  four 
instalments  of  25%  each,  the  best  entry  to  make  would  be : 

690. 


Sundries  Dr. 

Treasury  Stock,  25  shares 

$  500 

Capital  Stock,  75  shares' 

1500 

To  Sundries  Cr. 

Instalment  No.  2 

$500 

Instalment  No.  3 

500 

Instalment  No.  4 

500 

Surplus  Account 

500 

John  Jones  forfeits  100  shares  of  capital  stock  after  paying 
first  instalment  of  25%,  equal  to  25  full  paid  shares,  which 
amount  is  placed  in  the  Treasury,  the  remaining  75  shares' 
being  debited  to  capital  stock  as  an  offset  to  original  issue. 

691.  We  debit  Treasury  Stock  Account  for  25  shares  be- 
cause it  is  a  real  acquisition  to  the  Treasury.  The  amount  it 
represents  is"  a  real  gain  to  us,  and  the  stock  obtained  in  this 
way  is  an  asset.  We  debit  Capital  Stock  Account  for  the  75 
shares  because  our  outstanding  capital  is  reduced  that  much 

*Vide  paragraph  692. 


AND   CORPORATION   LAW  257 

(stock  once  issued  and  paid  for  is  regarded  as  outstanding), 
and  because  as  we  have  received  nothing  for  it,  it  is  in  the 
same  position  as  though  it  were  never  issued.  Its  return  has 
reduced  our  Contingent  LiabiHties*  to  the  extent  that  it  has 
reduced  our  Contingent  Assets,  and  its  re-issue  will  bring 
about  the  original  condition. 

Forfeited  Shares  Account. 

692.  Some  accountants  debit  a  Forfeited  Shares  Account 
for  all  the  stock  forfeited,  but  it  is  thought  to  be  better  prac- 
tice to  debit  Treasury  Stock  Account  for  the  number  of  shares 
equal  at  par  to  the  amount  paid  on  forteited  stock,  and  to  debit 
Capital  Stock  Account  for  the  balance,  since  this  balance  is  a 
negative  to  the  original  issue.  The  principal  object  in  debiting 
a  Forfeited  Shares  Account  is  to  enable  the  company  to  resell 
this  stock  below  par,  it  being  perfectly  legitimate  for  the  com- 
pany to  sell  this  stock  at  a  discount  equivalent  to  the  amount 
received  on  it  in  the  first  instance.  This  is  a  consideration 
sometimes',  and  circumstances  may  make  this  latter  method 
preferable,  although  it  should  be  borne  in  mind  that  ''real" 
treasury  stock  may  also  be  sold  at  a  discount.  See  paragraphs 
302  to  305. 


CHAPTER  XVL 


Issuing  Entire  Capital  Stock  of  $1,000,000  Shares  to  One 
Individual — Chief  Consideration,  Undivided  Interests  in  Min- 
ing Claims — Individual  Donates  460,000  Shares  to  Treasury — 
Paying  for  Property,  Leases  and  Services  With  Treasury 
Stock — Opening  and  Closing  the  Books — Circumventing  the 
Law — Analyzing  the  Scheme — A  Lucent  Example  of  "Wild 
Cat"  Finance,  and  its  Legitimate  Counterpart. 


693.  It  frequently  happens  these  days  that  a  corporation 
is  organized  for  the  purpose  of  taking  over  certain  inventions"^- 
or  properties  and  the  entire  capital  stock  is  issued  fully  paid-up 

*Vide  paragraph  450. 
*2Vide  paragraph  418. 


258  CORPORATION   ACCOUNTING 

in  exchange  for  said  inventions  or  properties — the  company 
relying  on  the  sale  of  donated  stock*  to  develop  its  patents  or 
properties,  as  the  case  may  be;  some  times  there  is  a  little 
variation  to  the  proposition,  the  vendor  offering  a  certain 
amount  of  cash  in  addition  to  his  properties,  in  consideration 
of  the  full  issue  of  stock  to  him.  One  of  these  companies  was 
organized  in  a  certain  mining  district  in  Colorado  a  couple 
years  ago  and  the  writer  was  asked  to  formulate  entries  for 
the  opening  of  the  books.  Following  are  extracts  from  the 
minutes  of  this'  corporation  (fictitious  names  being  substituted 
for  the  real  names  of  persons  and  properties). 

694.  Minutes  of  October  i,  1903. 

To  the  Stockholders  and  Directors  of: 
The  Dore  Mining  and  Milling  Co. 
Gentlemen : 

I  offer  to  convey  by  mining  deed  to  your  company  an 
undivided  one-half  interest  in  the  Buck  Horn  Lode  Mining 
claim,  an  undivided  three-fourths  interest  in  the  Ocean  Spray 
Lode  Mining  claim,  an  undivided  three-fourths  interest  in  the 
Adelaide  Lode  Mining  claim,  all  situated  in  Clear  Creek  Min- 
ing District,  Unison  Co.,  Colo, ;  and  to  pay  into  the  Treasury 
of  your  company  the  sum  of  $7500  in  gold  coin,  in  considera- 
tion of  your  issuing  to  me  the  entire  capital  stock  of  your  com- 
pany— one  million  shares  of  the  par  value  of  $1,000,000  fully 
paid  and  non-assessable.  In  the  event  of  your  accepting  this 
offer,  I  agree  to  lodge  with  the  company  four  hundred  and 
sixty  thousand  (460,000)  shares  of  the  said  capital  stock,  to 
be  sold  for  the  benefit  of  the  company,  for  either  money,  prop- 
erty, leases,  bonds  or  options ;  at  such  price,  and  upon  such 
terms,  and  in  such  amounts,  as  the  Board  of  Directors  of  said 
company  may  from  time  to  time  determine;  empowering  the 
said  Board  of  Directors  to  dispose  of  said  stock  for  the  interest 
of  said  company  in  any  manner  and  upon  such  terms  as  they 
may  deem  best. 

Yours*  very  truly, 

Charles  Johnson. 

695.  "The  Board  after  due  consideration  of  the  foregoing 
offer  accepted  same,  Johnson  not  voting,  but  the  other  mem- 
bers voting  unanimously,"  (It  would  appear  from  this  that 
Johnson  was  a  director)  ''thereupon,  the  said  Johnson  deliv- 
ered to  the  Board  a  mining  Deed  running  to  this  company  con- 
veying the  aforesaid  properties,  which  deed  upon  the  approval 
of  the  company's  counsel  was  accepted  as  sufficient,  and  or- 

*Vide  Chapter  XIV. 


AND    CORPORATION   LAW  259 

dered  recorded.  Johnson  then  paid  over  to  the  treasurer  for 
use  of  this  company  $7,500  in  gold  coin,  and  thereupon  the 
president  and  secretary  were  authorized  and  directed,  by  reso- 
lution, to  issue  to  Mr.  Johnson  the  entire  capital  stock  of  this 
company  consisting  of  1,000,000  shares  of  the  par  value  of 
$1.00  per  share — fully  paid  and  non-assessable, — in  one  or 
more  certificates  as  Mr.  Johnson  might  desire. 

696.  "Pursuant  to  the  foregoing,  the  president  and  secre- 
tary issued  to  Mr.  Johnson  two  certificates,  one  for  five  hun- 
dred and  forty  thousand  (540,000)  shares;  and  one  for  four 
hundred  and  sixty  thousand  (460,000)  shares  of  stock,  fully 
paid  and  non-assessable;  whereupon  Mr.  Johnson  assigned  to 
the  secretary  of  this  company  four  hundred  and  sixty  thou- 
sand shares,  to  be  held  by  him  and  his  successors  in  office,  in 
trust,  for  the  benefit  of  this  company,  in  accordance  with  the 
terms  of  Mr.  Johnson's  offer. 

697.  "An  offer  was  then  received  from  Mr.  H.  L.  Winslow, 
to  convey  by  Mining  Deed  to  this  company  the  remaining  un- 
divided one-fourth  interest  in  the  Adelaide  Lode  Mining  claim, 
for  a  consideration  of  10,000  shares  of  treasury  stock.  On 
motion,  the  board  accepted  Mr.  Winslow's  offer,  and  the  presi- 
dent and  secretary  were  instructed  to  issue  to  Mr.  Winslow  a 
certificate  for  10,000  shares  of  treasury  stock,  on  his  delivering 
to  this  company  a  satisfactory  deed  to  the  aforementioned  one- 
fourth  interest  in  the  Adelaide  Lode  Mniing  Claim." 

698.  On  October  6th,  1903,  the  following  resolution  was 
passed :  "Resolved,  that  the  treasurer  of  this  company  is  em- 
powered, and  is  hereby  instructed,  to  offer  for  sale  200,000 
shares  of  treasury  stock  at  one  and  one-half  cents  per  share, 
and  stockholders  of  record  are  entitled  to  subscribe  for  the 
same  in  proportion  to  their  holdings." 

699.  On  January  6th,  1904,  a  similar  resolution  to  the  fore- 
going was'  passed,  and  other  resolutions  distributed  the  re- 
mainder of  the  treasury  stock  as  follows : 

H.  M.  Simmons,  for  services  rendered  as  director,  1000 
shares. 

E.  P.  Longwell,  for  his  undivided  one-half  interest  in  the 
Buck  Horn  Lode  Mining  Claim,  10,000  shares. 

F.  J.  Spangle,  for  his  undivided  one-fourth  interest  in  the 
Ocean  Spray  Lode  Mining  Claim,  4,000  shares. 

J.  K.  Charing,  for  his  services  in  procuring  a  lease  of  the 
Big  "I"  Mining  Claim  (including  all  expenses  incident 
thereto),  6,000  shares. 

G.  L.  Brownlee,  for  services  as  secretary  for  the  first  year, 
10,000  shares. 


260  CORPORATION   ACCOUNTING 

Allotment  No.  i,  per  resolution  of  the  Board  passed  Oct.  6, 

1903,  200,000  shares  at  i>^c. 

Allotment  No.  2,  per  resolution  of  the  Board  passed  Jan.  6^ 

1904,  200,000  shares  at  i>^c. 
Balance  in  Treasury  19,000  shares. 

700.  There  are  a  number  of  irregularities  in  the  foregoing 
proceedings.  A  corporation  can  act  only  through  its  repre- 
sentatives— the  Board  of  Directors ;  and  these  directors  must 
of  necessity  be  stockholders'  or  subscribers  to  stock  of  the  cor- 
poration, and  Mr.  Johnson's  offer  requires  of  the  corporation 
something  which  it  does  not  possess,  viz.,  the  stock  already 
issued.  Furthermore,  the  issuance  to  Mr.  Johnson  of  the  en- 
tire Capital  Stock,  would  leave  the  corporation  without  stock- 
holders, and  consequently  without  any  directors — a  condition 
under  which  no  business  corporation  can  exist.  The  offer 
should  be  made  then  in  this  way  (the  suggestion  is  by  Mr. 
Conyngton). 

701.  *Tn  exchange  and  full  payment  for  the  entire  capital 

stock  of  the Company,  including  with 

the  consent  of  the  incorporators,  the  shares  subscribed  for  by 
them,  T  hereby  offer  etc.     *     *     * 

*Tf  the  above  proposition  is  accepted,  the  entire  capital 
stock  of  your  company,  excepting  the  shares  already  sub- 
scribed for,  is  to  be  issued  to  my  order  against  the  delivery  to 
your  representatives  of  etc." 

702.  Or  the  incorporators'  might  make  a  conditional  as- 
signment of  their  subscriptions  to  Mr.  Johnson ;  the  condition 
being  the  acceptance  of  his  proposition.  If  they  make  an  ab- 
solute assignment  of  their  interests,  they  might  disqualify 
themselves  from  acting  as  directors  to  accept  Johnson's  propo- 
sition.    In  this  latter  case  the  offer  would  read. 

703.  'T  hereby  offer,  in  exchange  and  full  payment  for  the 
entire  capital  stock  of  your  company,  including  the  shares  sub- 
scribed for  by  the  incorporators  thereof,  (their  subscriptions 
having  been  conditionally  assigned  to  me),  the  property  de- 
scribed as  follows." 

704.  For  complete  and  model  forms  of  "Proposals  to  ex- 
change property  for  stock"  see  Conyngton  on  Corporate  Man- 
agement, pages'  218  and  219. 

Form  of  Assignment  (Conyngton) 

705.  We,  the  undersigned,  being  all  the  incorporators  of 

the Company,  in  consideration  of  the  sum 

of  one  dollar  to  each  of  us  in  hand  paid,  the  receipt  whereof 


AND   CORPORATION   LAW  261 

is  hereby  acknowledged,  and  for  other  good  and  valuable  con- 
siderations, do  hereby  sell,  assign  and  make  over  unto  Chas. 
Johnson  all  of  our  subscription  rights  in  the  said  company, 
conditioned,  however,  upon  the  acceptance  by  said  company 
of  his  proposition  of  this  date,  to  take  the  whole  capital  stock 
of  said  company,  and  to  go  into  effect  only  upon  due  tender 
by  him  of  payment  for  such  capital  stock,  according  to  the 
terms  of  his  said  proposition. 
Witness  our  hands  &  etc." 

706.  It  will  be  seen  that  under  the  last  two  outlined  pro- 
posals the  stock  was  to  be  issued  to  Mr.  Johnson  or  his  order  ; 
there  is  nothing  to  prevent  Mr.  Johnson  paying  for  anybody's 
subscription,  an  issue  to  his  order  is  legally  an  issue  to  him; 
so  in  order  to  preserve  the  directorate  of  the  corporation  Mr. 
Johnson  has  one  or  more  shares  issued  to  each  director. 

707.  The  stock  should  be  assigned  to  the  treasurer  of  the 
company  and  not  to  the  secretary.  The  use  of  the  term 
"Treasury  Stock,"  presupposes  that  the  stock  is  in  the  Treas- 
ury or  hands  of  the  treasurer ;  but  while  it  is  theoretically  in 
his  hands,  it  is  bad  practice  to  issue  it  to  him,  as  this  would 
enable  him  to  dispose  of  it  without  the  knowledge  of  the  di- 
rectors or  officers ;  and  in  the  hands'  of  a  purchaser  for  value 
and  in  good  faith,  the  company  might  be  compelled  to  recog- 
nize such  purchaser  as  a  stockholder. 

Opening  Entries. 

708.  Assuming  that  the  corporation  was  regularly  organ- 
ized, and  that  all  the  foregoing  formalities  were  complied  with,- 
the  following  would  be  the  opening  and  subsequent  entries : 

709.  First  Entry. 

Subscription  Dr.  $50 

To  Capital  Stock  $50 

Chas.  Johnson  10  shares 

H.  L.  Winslow  10  shares 

H.  M.  Simmons  10  shares 

E.  P.  Longwell  10  shares 

F.  J.  Spangle  10  shares 

709  (a).  This  is  sufficient  to  organize  the  corporation,,  give 
it  a  Board  of  Directors,  and  place  it  in  a  position  to  entertain 
Mr.  Johnson's  proposition. 

710.  As  soon  as  Mr.  Johnson's  proposition  is  accepted,, 
and  the  deed  passes,  we  make  the 


:262  CORPORATION   ACCOUNTING 

Second  Entry. 

Subscription  Dr.  $999,950 

To  Capital  Stock  $999^95© 

Chas.  Johnson  subscribes  for  999,950  shares. 

711.  Mr.  Johnson  could  not  subscribe  for  the  entire  cap- 
ital stock,  because  the  incorporators  had  already  subscribed 
for  50  shares  and  capital  stock  was  credited  for  the  amount  of 
their  several  subscriptions;  but  there  is  nothing  to  prevent 
him  paying  for  the  entire  subscription. 

712.  At  this  stage  of  the  proceedings'  the  corporators  as- 
sign their  subscriptions  to  Mr.  Johnson,  but  record  of  this  is 
not  yet  made  on  the  Transfer  Book  and  Stock  Ledger;  or  if  a 
conditional  assignment  was  made,  it  now  becomes  absolute 
and  effective,  and  the  transfer  is  made  accordingly  at  the  pro- 
per time. 

713.  Third  Entry. 

Sundries  Dr. 

Mines  and  Mining  Rights'      $992,500 

Cash  7,500 

To  Subscription  Account  $1,000,000 

Chas.  Johnson  pays  $7500  in  cash,  and  assigns  his  interests 
etc.,  in  full  payment  of  entire  subscription,  as  per  tender  and 
resolution  of  acceptance.  See  minutes  of  first  Directors 
Meeting. 

714.  The  entire  capital  stock  has  now  been  paid  for  by 
Mr.  Johnson,  and  its  issue  is  subject  to  his  order;  so  he  directs 
the  issue  of  one  share,  or  one  thousand  shares,  to  each  of  the 
directors',  according  to  a  pre-arranged  plan.  As  soon  as  this 
stock  is  issued  to  them,  the  previous  transfers  are  recorded  on 
the  books.  The  reason  for  not  recording  them  before,  is  to 
have  the  directors  appear  as  stockholders  of  record  during  the 
process  of  change,  and  thus  prevent  the  raising  of  any  ques- 
tion as  to  their  qualifications  ad  interim.  Care  must  be  taken 
not  to  do  anything  that  would  forfeit  the  charter. 

715.  Fourth  Entry. 

Treasury   Stock  Dr.  $460,000 

To  Surplus  (or  Donation)  $460,000 

Chas.  Johnson  donates  460,000  shares  to  be  sold  for  the 
benefit  of  the  company. 

716.  The  next  entry  would  depend  on  the  order  in  which 
events  took  place.  We  will  suppose  that  order  to  be  as  follows': 


AND   CORPORATION   LAW  263- 

717.  Fifth  Entry. 

Mines  and  Mining  Rights  Etc. 

Dr.  $24,000 
To  Treasury  Stock  $24,000 

E.  P.  Longwell  receives  10,000  shares  of  treasury  stock  for 
an  undivided  half  interest  in  the  Buck  Horn  Lode ; 

F.  J.  Spangle  receives  4000  shares  treasury  stock  for  an 
undivided  one-fourth  interest  in  the  Ocean  Spray  Lode,  and 

H.  F.  Winslow  receives  10,000  shares  treasury  stock  for  an 
undivided  one-fourth  interest  in  the  Adelaide  Lode. 

718.  This  gives  the  Dore  Mining  &  Milling  Co.  complete 
title  to  the  whole  of  the  three  mining  claims. 

719.  Sixth  Entry. 

Organization  Expense  $6,000 

To  Treasury  Stock  $6,000 

J.  K.  Charing  receives  6000  shares'  of  stock  for  his  services- 
in  procuring  lease  of  Big  "I"  Mine,  and  perfecting  organiza- 
tion. 

720.  Seventh  Entry. 

Sundries  Dr. 

Cash  $3,000 

Stock  Discount  197,000 

To  Treasury  Stock  $200,000 

200,000  shares'  of  treasury  stock  sold  at  a  discount  of 
98^%,  per  resolution  etc. 

721.  It  is  legitimate  to  sell  treasury  stock  that  has  been 
paid  for  once,  at  any  price  the  directors  may  determine ;  pro- 
vided the  stockholders  are  allowed  to  subscribe  as  in  this  case. 

'J22.     Eighth  Entry. 

Same  as  seventh  entry. 

723.     Ninth  Entry. 

Expense  Dr.  $11,000 

To  Treasury  Stock  $11,000 

H.  M.  Simmons  receives  1000  shares  treasury  stock  for  his 
services  as  director,  and  G.  L.  Brownlee  receives  10,000  shares- 
of  treasury  stock  for  his  services  as  secretary  for  the  first  year. 


264  CORPORATION   ACCOUNTING 

724.  When  all  these  entries  shall  have  been  posted  there 
will  be  a  balance  of  $19,000  (representing  19,000  shares)  in 
Treasury  Stock  Account.  This  will  stand  on  the  books  as  an  as- 
,set.  The  balance  on  Stock  Discount  Account  amounting  to  $394,- 
000  should  be  closed  into  Surplus  or  Donation  Account.  Organ- 
ization Expense  under  ordinary  conditions  might  be  written  off 
in  periodical  instalments,  but  under  these  circumstances  it  is 
best  to  charge  it  into  Surplus  Account.  This  would  leave  a  bal- 
ance in  Surplus  Account  of  $60,000.  Expense  Account  still 
stands  debited  for  $11,000,  but  as  this  represents  $1000  in  stock 
paid  one  director,  for  some  unexplained  reason,  and  $10,000 
paid  to  the  secretary  for  the  first  year's  services,  it  could  be 
carried  until  the  end  of  the  year  as  a  part  of  the  current  operat- 
ing expenses  of  the  year,  and  then  charged  into  Profit  and 
Loss;  but  inasmuch  as  these  payments  are  largely  in  the  na- 
ture of  gifts,  and  as  the  surplus  is  in  fact  a  fictitious  one,  there 
would  be  but  little  violence  done  to  the  ethics  of  accounting 
if  this  too  was  charged  into  Surplus  Account.  If  this  was  done 
all  the  accounts  would  be  closed  excepting  Mines,  Capital 
Stock,  Treasury  Stock,  Surplus  and  Cash ;  and  the  following 
statement  would  represent  the  Assets  and  Liabilities  of  the 
company  as  taken  from  the  books : 

725.     Assets. 

Mines,  etc.  $1,016,500 

Treasury  Stock  19,000 

Cash  13,500      $1,049,000 


Liabilities. 

Capital  fully  paid  $1,000,000 

Surplus  49,000      $1,049,000 


726.  Here  we  have  a  company  with  a  paid-up  capital  of 
$1,000,000;  a  Surplus  of  $49,000  and  a  working  capital  of  only 
$13,500, — the  treasury  stock  at  past  prices  is  worth  only  $385. 
This  is  a  mere  bagatelle  for  the  development  of  four  or  five 
quartz  claims,  and  the  directors  would  have  to  resort  to  the 
alternative  of  donating  more  stock,  selling  some  claims,  or 
borrowing  money  on  their  inflated  and  doubtful  assets.  The 
scheme  looked  wild  and  woozy  to  the  writer  and  he  set  a  value 
on  his  services,  cash  in  advance,  which  scared  them  oflf;  how- 
ever he  worked  the  problem  out  for  his  own  edification  and  he 
presents  it  here  as  an  example  in  wild  and  illegitimate  finance. 
It  is  more  than  likely  that  no  attempt  would  be  made  to  de- 
velop these  properties,  but  that  an  attempt  would  be  made  to 


AND   CORPORATION   LAW  265 

boom  them  and  sell  them;  the  company  could  then  reduce  its 
capital  and  declare  a  dividend. 

'J2'j.  As  stated  in  the  opening  paragraph  of  this  chapter 
many  companies  issue  their  full  capital  to  an  individual 
against  property  or  patents.*  The  vendor,  of  course,  brings 
about  the  organization  of  the  company  and  it  is  often  legiti- 
mate enough.  They  simply  capitalize  the  goodwill  or  future 
profits;  and  the  prospects  and  the  outcome  frequently  justify 
and  legitimize  their  appraisements.  The  foregoing  formulae 
v^ill  suffice  to  illustrate  the  manner  of  starting  off  any  such  a 
company.  The  principal  is  the  same,  the  application  can  be 
varied  to  conform  to  varying  plans  and  conditions  of  organi- 
zation. 


CHAPTER  XVII. 


Opening  the  Books  for  a  Mercantile  Business — Crediting 
Capital  Stock  with  Subscribed  Capital  Only — Paying  50%  at 
the  Time  of  Subscribing  and  50%  on  Call — Calling  Balance 
of  Subscription  at  End  of  First  Year — Reducing  Capital  Stock 
— Making  up  Statement. 


728.     Subscription    Account  Dr.  $100,000 

To  Capital  Stock  $100,000 

A Shares  $20,000 

B Shares  20,000 

C Shares  20,000 

D Shares  20,000 

E Shares  20,000 

Capital  Stock  Subscribed  for  as  above,  payable  50%  dov^n 
and  50%  on  call. 

730.     Write  the  name  of  each  stockholder  on  the  Subscrip- 
tion Account,  leaving  two  lines  opposite  each  name  for  pay- 

*Vide  paragraph  418,  also  paragraph  313. 


266 


CORPORATION   ACCOUNTING 


ments.  Credit  each  one's  payment  opposite  his  name  on  Sub- 
scription Account.  This  account  will  then  show  a  balance 
of  50  per  cent  owing  on  the  Subscribed  Capital.  Take  no  ac- 
count of  the  Unsubscribed  Capital  Stock  on  the  General 
Ledger.  The  Stock  Ledger,  the  Minute  Book,  the  By-Laws 
or  even  the  certificates  will  show  the  authorized  capital. 

Calling  in  Subscriptions. 

731.  Supposing  that  at  the  end  of  the  first  year  the  direc- 
tors decide  to  call  on  the  stockholders  for  the  balance  of  50 
per  cent  due  on  subscription,  and  also  decide  to  reduce  the  Cap- 
ital Stock*  to  $100,000;  what  are  the  entries? 

732.  Note  that  the  stockholders  have  been  charged  on  the 
Subscription  Account  for  the  full  amount  of  their  subscrip- 
tion, hence  there  is  no  Journal  entry  to  make,  simply  a  Cash 
Book  entry  like  the  following: 


732. 


Cash  Book. 


Subscription  Account    $50,000 

For  balance  of  50  per  cent 
on  subscription  acct.  as 
follows : 
A.  B.  C.  D.  and  E. 


733-  Or  if  they  pay  at  odd  times,  credit  Subscription  Ac- 
count as  payments  are  made. 

Reducing  Capital  Stock. 

734.  As  will  be  observed,  capital  stock  has  not  been  cred- 
ited for  the  full  capital  on  the  general  books  and  therefore 
there  is  no  entry  to  be  made  on  the  general  books  at  the  time 
it  is  reduced.  Simply  make  the  entry  on  the  minutes,  take  up 
the  old  certificates,  and  issue  new  ones  showing  the  new  cap- 
italization, and  make  the  proper  entries  on  the  Stock  Ledger. 

*Vide  paragraph  474  et  seq. 


AND    CORPORATION   LAW  267 

735.  In  making  up  a  statement,  the  condition  of  Capital 
Stock  may  be  expressed  in  either  of  the  following  way  s : 

On  the  Liability  side, 

Subscribed  Capital  $100,000 

On  the  Assets  side, 

Due  on  Stock  Subscriptions  50,000 

or  on  the  liability  side  alone. 
Subscribed  Capital  $100,000 

Less  due  from  Stockholders  50,000 

Paid-up  Capital  $50,000 

736.  In  no  case  should  the  Stockholders  liability  be 
omitted  from  the  statement.  This  liability  exists  both  as  to 
the  Corporation  and  its  creditors,  and  its  appearance  on  a 
statement  adds  an  element  of  strength  to  it. 


CHAPTER   XVIII. 


Opening   the   Books   of   a    Company   Showing   Only   the 
Paid-up  Capital  on  the  Ledger.    Stock  Paid  for  in  Two  Instal- 
ments— All  Subscriptions  Paid  in  Cash — Unpaid  Subscription  . 
as  a  Resource — Reducing  Capital  Stock  to  Create  a  Surplus —     y 
Dividends  not  Affected  by  Reduction  of  Capital. 


737.  A.  Wood,  B.  Cutter,  C.  Sawyer,  D.  Planer  and  E. 
Trimmer  desire  to  go  into  the  business'  of  manufacturing  doors 
and  sashes,  and  they  organize  a  company  to  be  known  as  the 
Sash  and  Door  Factory  Company.  The  capital  stock  is  placed 
at  $75,000,  750  shares  of  the  par  value  of  $100  per  share.  They 
desire  that  the  capital  stock  shall  be  credited  for  only  the 
paid-up  capital.  They  are  to  pay  cash  for  the  stock,  and  they 
each  subscribe  for  100  shares  payable  in  two  instalments; 
what  are  the  entries  ? 


268  CORPORATION   ACCOUNTING 

First  Method. 
738.  Cash  Book. 


Capital  Stock  $25,000 

For  50  per  cent  of  the  par 
value  of  500  shares  of 
stock  as  follows : 


739.  Here  write  in  the  names  of  subscribers  and  the 
amount  paid  by  each.  This  is  a  complete  record  in  itself.  It 
shows  that  two-thirds  of  the  stock  has  been  subscribed,  that 
one-third  is  paid  in  cash,  and  that  the  company  starts  out  with 
a  paid-up  Capital  of  $25,000;  and  that  it  has  as  a  resource 
$25,000  more  on  call.  This  latent  resource  is  not  expressed  on 
the  books,  for  the  reason  that  it  would  involve  the  expression 
of  a  corresponding  liability ;  and  it  is  desired  that  only  the  net 
Capital  and  net  liability  should  show  on  the  books.  The  cred- 
itors of  the  company  are,  we  may  be  assured,  aware  of  the 
existence  of  this  resource,  and  of  its  potential  value. 

Second  Method. 

740.  Subscription  Account  $25,000 

To  Capital  Stock  $25,000 

For  50  per  cent  of  subscription  due  and  payable  as  per  the 
following  list  of  subscribers  : 

740  (a).  Here  give  names  and  amounts;  and  as  the  sub- 
scriptions are  paid  credit  Subscription  Account. 

Third  Method. 

741.  Instalment  Account  No.  i     Dr.  $25,000 

To  To  Capital  Stock  $25,000 

For  first  instalment  of  50  per  cent  on  subscribed  capital 
as  follows : 

A.  Wood,    100  shares  $5,000 

B.  Cutter,  100  shares  5,ooo 

C.  Sawyer,  100  shares  5,000 

D.  Planer,  100  shares  5,ooo 

E.  Trimmer,  100. shares  5,000 

•  $25,000 


AND   CORPORATION   LAW  269 

741  (a)  As  payments  are  made  debit  cash  and  credit  in- 
stalment account. 

Reducing  Capital  Stock  to  Create  a  Surplus.* 

742.  Suppose  that  at  the  end  of  the  first  year  the  capital 
stock  is  fully  subscribed  and  paid  for,  for  the  purpose  of  in- 
creasing the  capacity  of  the  factory,  and  the  company  goes 
along  prospering  and  paying  dividends  for  a  number  of  years, 
when  they  strike  a  dull  year  or  two  and  the  books  show  an  im- 
pairment of  Capital  amounting  to  $20,000;  the  directors  do 
not  wish  this  showing  to  appear  on  the  books  and  in  order  to 
wipe  it  out  they  decide  to  reduce  the  Capital  Stock  to  $50,000, 
and  show  a  balance  of  $5,000  in  the  Surplus  Account;  what 
entry  ? 

743.  Capital  Stock  Dr.  $25,000 

To  Impairment  $20,000 

To  Surplus  5,000 

Capital  Stock  reduced  per  resolution  of  the  Board  of  Di- 
rectors.   Minute  Book,  page on  authority  issued  from 

the  office  of  the  Secretary  of  State. 

743  (a)  This  entry  reduces  the  Capital  Stock  to  $50,000, 
balances  the  Impairment  Account  and  shows  a  surplus  of 
$5,000. 

744.  The  stock  of  the  company  is  now  reduced  from  750 
to  500  shares,  the  old  certificates  are  surrendered  and  each 
stockholder's  account  is  balanced  in  the  Stock  Ledger;  then 
they  are  issued  new  certificates  for  two-thirds  of  the  amount 
of  the  old  certificates,  and  accounts  are  reopened  with  them  in 
the  Stock  Ledger.  They  have  less  stock  now  of  course,  but 
it  makes  no  difference  as  far  as  dividends  are  concerned;  for 
instead  of  receiving  a  smaller  percentage  on  a  greater  number 
of  shares,  they  receive  a  greater  percentage  on  a  smaller  num- 
ber of  shares. 

*Read  paragraphs  475  to  483.  r  ?| 


CHAPTER  XIX. 

Organizing  a  Corporation  on  a  Basis  of  Two-Thirds  Stock 
and  One-Third  Bonds — Objects  to  be  Attained,  and  Dangers 
Invited  by  This  Method  of  Organizing — Opening  the  Books. 


745.  It  occasionally  happens  that  persons  owning  or  con- 
trolling certain  valuable  property,  or  a  certain  well  established 
business,  which  they  wish  to  develop  and  extend,  incorporate 
for  an  amount  considerably  less  than  the  value  of  their  tangi- 
ble assets,  and  issue  bonds  for  the  difference  between  that  and 
the  actual  value  of  these  assets.  The  object  of  doing  this  h 
if  the  business  is  successful  the  stock  would  earn  more  in  divi- 
dends than  would  have  to  be  paid  in  interest  on  an  equal 
amount  of  bonds ;  and  this  difference  is  a  profit  to  the  stock- 
holders'. For  example,  suppose  a  company  was  formed  on  a 
basis  of  $100,000  stock  and  $50,000  bonds,  that  would  be  an 
invested  capital  of  $150,000.  Now  suppose  that  this  company 
earned  8%  or  $12,000  the  first  year,  on  this  investment,  and 
that  the  bonds  bore  only  5%  interest  payable  annually;  the 
stockholders  would  make  3%  interest  on  $50,000,  or  $1500, 
equivalent  to  5^%  on  the  capital  stock.  This  form  of  incor- 
poration should  only  be  resorted  to  where  profits  are  very  cer- 
tain; because  interest  on  bonds  must  be  paid,  whether  earned 
or  not,  or  foreclosure  proceedings  will  take  place. 

746.  Opening  the  Books. 


roperty 

Dr. 

$1 

:  50,000 

(itemized) 

To  Capital 

Stock 

$100,000 

To  Surplus 

50,000 

For  $100,000  capital  stock  issued  against  tangible  assets 
worth  $150,000,  the  excess  assets  being  credited  to  surplus  to 
secure  a  bond  issue  of  like  amount. 

747.  The  bonds  are  issued  against  these  excess  assets  and 
when  sold  the  usual  entries  are  made. 


CHAPTER  XX. 

Incorporating  the  Estate  of  a  Deceased  Person — Procedure 
When  Separate  Bequests  are  Left  to  Relatives  and  Also  an 
Equal  Undivided  Interest  in  the  Residue — When  Division  is 
"Share  and  Share  Alike"— When  Only  the  Undivided  Inter- 
ests are  Incorporated — When  the  Widow  is  Left  a  Life  In- 
come— Incorporating  at  Less  Than  Real  Values — At  More 
Than  Real  Values — Interests  of  Minor  Heirs — Adjustment 
of  Interests. 


748.  It  has  become  quite  a  popular  custom  of  late  years 
among  the  heirs  to  large  estates,  to  incorporate  these  estates, 
and  thus  preserve  their  integrity  and  their  income  producing 
value. 

749.  For  example,  John  Brown  dies  leaving  an  estate  of 
uncertain  value,  consisting  of  real  and  personal  property, 
stocks,  bonds,  securities,  life  insurance,  etc.  After  making 
several  minor  bequests,  he  divides  the  remainder  of  his  estate 
among  the  members  of  his  family,  one  of  whom  is  a  minor; 
or  perhaps  he  leaves  certain  specified  properties  to  each,  and 
divides  the  residue  equally  among  all.  The  heirs  decide  to  in- 
corporate their  interests ;  what  is  the  procedure  and  what  the 
entries  for  opening  the  books?  It  must  be  understood,  of 
course,  that  the  executors  administer  the  affairs  of  the  estate 
until  the  will  is  proved  and  a  decree  of  distribution  made  by 
the  probate  court.  The  executors  under  the  order  of  the  court 
pay  all  expenses  and  bills  against  the  estate,  and  sell  so  much 
property  as  may  be  necessary  to  pay  such  bills  and  expenses, 
and  also  the  minor  bequests  to  legatees;  after  this,  the  distri- 
bution is  made  among  the  beneficiaries.  For  duties  of  execu- 
tors and  correct  methods  of  executorship  accounting  see  ''Ac- 
counts of  Executors  and  Trustees'  by  Joseph  Hordcastle  C. 
P.  A." 

750.  Now  let  us  suppose  that  the  heirs  to  the  estate  are: 
Mrs.  Mary  Brown,  who  was  left  certain  property  appraised  at 
$75,000;  John  Brown  Jr.,  property  appraised  at  $52,000;  Geo. 
Brown,  property  appraised  at  $48,000;  Caroline  Brown,  prop- 
erty appraised  at  $46,000  and  Martin  Brown,  a  minor,  property 


272 


CORPORATION   ACCOUNTING 


appraised  at  $44,000.  In  addition  to  this,  there  was  a  residue 
of  $85,000  after  all  debts  and  claims  were  paid,  to  be  divided 
equally  among  each  of  them.  These  heirs  decided  to  form  a 
corporation  to  be  known  as  "The  John  Brown  Estate,"  with 
a  capital  of  $300,000,  and  to  subscribe  for  stock  in  proportion 
to  their  respective  interests — the  stock  is  to  be  $100  a  share. 
What  proportion  of  stock  is  each  to  receive,  and  what  are  the 
entries  to  open  the  books? 

751.     Table  Showing  Interests  and  Shares  of  Each. 


HEIRS 

Separate 
Bequests 

Propor- 
tion of 
Residue 

Total 
Interest 

Total 
Value  of 
Shares 

Ratio  of 
Apportion- 
ment 

Individ- 
ual No.of 
Shares 

Mary  Brown 

75,000 

17,000 

92,000 

300,000 

35:30::920 

788  4-7 

John  Brown,  Jr. 

52,000 

17,000 

69,000 

35:30:  :690 

591  3-7 

Geo.  Brown 

48,000 

17,000 

65,000 

35:30::6S0 

557  1-7 

Caroline  Brown 

46,000 

17,000 

63,000 

35:30::630 

540 

Martin  Brown 

44,000 

17,000 

61,000 

35:30:  :610 

522  6-7 

Totals 

265,000 

85,000 

350,000 

300,000 

3,000 

752.  The  above  table  shows  that  the  incorporated  inter- 
ests are  worth  $350,000,  and  as  the  capital  stock  of  3000  shares' 
is  only  $300,000,  it  follows  that  the  shares  apportioned  to  each 
must  bear  the  same  ratio  to  their  interests  as  the  total  shares 
bear  to  the  total  interests;  and  this  ratio  in  its'  lowest  terms 
is :  As  7  is  to  6  (7 :6) ;  therefore,  if  we  multiply  the  interests 
of  each  by  6  and  divide  by  7  we  obtain  the  nominal  value  of 
the  stock  to  which  they  are  entitled,  and  by  pointing  off  two 
places  to  the  left  we  have  the  number  of  shares;  or  we  state 
the  proportions  as  in  the  table,  and  the  answer  comes  out  in 
shares. 

753.  Now  since  the  actual  capital  of  the  corporation  is 
$350,000,  and  the  nominal  capital  is  only  $300,000,  it  follows 
that  the  new  corporation  starts  out  with  a  surplus  of  $50,000 ; 
so  we  make  the  following  entries  to  open  the  books : 


AND    CORPORATION   LAW  273 

754.     John  Brown  Estate  Dr. 
Real  Estate 

Residence  property  and  con- 
tents located  at  1000  Ches- 
nut  St.  $10,000. 

Brick  business  block  located 

at  100  Market  St.  40,000. 

Bonds. 

5  Spr'g  Valley  2nd  Mtg.  4%       $4,975- 
4  Pacific  El.  Ry  Co.  5%  3,600. 

Bank  Stock. 

50  shs.  Farmers  Nat'l  Bank     $15,000. 
Mortgages. 

First  Mtg.  on 7%  10,000. 

Industrial  Stock. 

2080  shs.  Brown  Bros.  Mfg. 

Co.,  at  125.  $260,000. 

Cash  6,425. 

To  Capital  Stock  $300,000 

Mary  Brown,  788  4-7  shs.  $78,857.14 
John  Brown  Jr.,  591  3-7  shs.  59,142.86 
Geo.  Brown,  557  1-7  shs.  55.714.29 

Caroline  Brown,  540  shs.  54,000.00 

Albert  Smith  Trustee  for 
Martin  Brown,  522  6-"]  shs.     52,285.71 


$300,000.00 
To  Surplus  Account  $50,000 

The  heirs  of  the  John  Brown  Estate  turn  over  to  the  cor- 
poration against  their  subscriptions,  assets  $50,000  in  excess 
of  Capital  Stock,  creating  a  Surplus  of  $50,000. 

755.  In  opening  the  ledger,  it  is  best  to  open  a  separate 
account  for  each  piece  of  property  and  for  each  class  of  stock, 
bonds,  etc.  This  is  the  only  practical  way  in  which  to  account 
clearly  and  intelligently  for  accretion  and  depreciation,  gains 
and  losses  on  separate  investments,  purchases'  and  sales ;  and 
it  makes  easy  the  arrangement  of  a  schedule  at  any  time. 

756.  It  will  be  observed  that  the  minor's  stock  is  issued 
to  a  Trustee  for  him.  If  the  testator  has  not  named  some  one 
to  act  as  trustee  or  guardian  for  the  minor,  the  Court  will  ap- 
point some  one  to  act  in  that  capacity. 


274  COKPOKATION  ACCOUNTING 

Another  Contingency. 

757.  If  the  property  had  been  divided  among  the  heirs 
"share  and  share  aUke"  we  would  open  the  books  in  this  man- 
ner. 

The  John  Brown  Estate   (itemized)         $350,000 

To  Capital  Stock  $300,000 

Mary  Brown           600  shs.  $60,000 

John  Brown  Jr.     600  shs'.  60,000 

Geo.  Brown            600  shs.  60,000 

Caroline  Brown      600  shs.  60,000 
Albert  Smith  trustee  for 

Martin  Brown     600  shs.  60,000 


,  To  Surplus  Account  $50,000 

Still  Another  Contingency. 

758.  If  the  interest  of  each  were  as  given  in  the  first  in- 
stance, and  the  estate  was  incorporated  for  $400,000,  open  the 
books  with  the  following  entry : 

John  Brown  Estate  (itemized)  Dr.  $350,000 

To  Capital  Stock  $350,000 

Mary  Brown  920  shs. 

John  Brown,  Jr.  690  shs. 

Geo.  Brown  650  shs. 

Caroline  Brown  630  shs. 
Albert  Smith,  trustee  for 

Martin  Brown  610  shs. 


Total     3,500  shs. 

The  John  Brown  Estate  incorporated  on  a  basis'  of  $400,- 
000,  of  which  $350,000  is  subscribed  and  paid  up,  as  per  the 
above  schedule. 

Various  Contingencies. 

759.  It  might  be  that  the  beneficiary  to  whom  was  left 
the  family  residence,  did  not  wish  to  put  it  into  the  corpora- 
tion, and  as  a  matter  of  fact  there  would  be  certain  articles  of 
personal  property  devised  to  certain  members,  or  to  all,  for 
their  personal  use,  which  no  one  would  think  of  putting  into 
a  corporation.  In  s'uch  cases  the  heirs  could  reserve  to  them- 
selves such  portions  of  their  separate  bequests  as  they  pleased, 
and  incorporate  the  remainder ;  or  the  heirs  might  incorporate 


AND   CORPORATION    LAW  275 

only  their  individual  interests  in  the  residue,  or  perhaps  the 
widow  might  be  left  a  life  income  from  certain  property,  the 
property  and  income  going  to  one  or  more  members  of  the 
family  after  her  death.  In  this  latter  case  the  stock  might  be 
issued  to  a  trustee,  who  would  pay  over  the  income  to  the 
widow  during  her  life-time,  and  surrender  his  trust  after  her 
death. 

Note :  This  suggests  in  a  general  way  the  methods  of  in- 
corporating the  estate  of  a  deceased  person.  The  author  pre- 
sumes, of  course,  that  the  heirs  would  consult  their  lawyers 
who  are  familiar  with  the  probate  laws  affecting  questions  in- 
volved in  a  matter  of  this  kind. 


CHz\PTER   XXI. 


Ante-Mortem  Estate  Incorporation — Excluding  Family 
Residence  and  Certain  Personal  Property  From  the  Incorpor- 
ation— Shares  Interest  Makes  Distribution  Easy  and  Practi- 
cal for  Testator — Name  and  Integrity  of  Estate  Preserved — 
No  Ambiguous  Nor  Uncertain  Clauses  to  Wrangle  About — 
Easy  to  Execute. 


760.  Some  owners'  of  large  estates  with  that  business 
sagacity  that  has  distinguished  the  accumulation  of  their  es- 
tates, do  not  leave  it  to  others  to  incorporate  their  interests 
when  they  are  gone,  but  while  the  life  current  courses  to  the 
brain  and  their  heads  are  clear,  they  plan  to  perpetuate  their 
estates,  solidify  their  interests,  and  make  easy  the  distribution 
of  those  interest  when  the  worker  is  summoned  to  rest. 

761.  In  such  a  case  the  business  man  makes  a  schedule 
of  the  property  he  wishes  to  put  into  the  corporation,  similar 
to  that  given  in  the  opening  entry  of  the  preceding  chapter. 
He  reserves,  perhaps,  the  family  home,  and  certain  personal 
property  which  he  desires  to  devise  in  a  manner  different  from 
the  remainder  of  his  estate..  He  then  incorporates,  allowing 
each  member  (or  at  least  two  members)  of  his  family  to  sub- 
scribe for  one  share  each,  so  as  to  complete  the  necessary  num- 
ber of  corporators.  The  corporation  is  then  put  under  way; 
the  capital  stock,  the  number  and  par  value  of  the  shares, 
the  paid-up  capital,  etc.,  having  all  been  decided  on  by  him, 

^  or  THE 

UNIVERSITY 


276  CORPORATION   ACCOUNTIISG 

and  the  books  opened  in  accordance  with  these  conditions. 
He  has  control  of  the  corporation,  he  owns  practically  all  of 
it,  and  when  it  comes  to  making  a  will,  he  bequeathes  so  many- 
shares  to  each.  This  is'  simple,  his  will  is  very  easily  executed, 
his  estate  is  an  integer  instead  of  a  number  of  separate  frac- 
tions— the  man  dies,  but  his  name,  his  memory  and  his 
achievements  live. 

N.  B.     See  foot  note  to  preceding  chapter. 


CHAPTER  XXn. 


Levying  an  Assessment — Form  of  Assessment  Book  and 
How  to  Keep  It — Entries  to  be  Made  When  Stock  is  Only 
Partly  Paid  For— When  It  is  Fully  Paid— Selling  Stock  to 
Pay  Delinquent  Assessment — Stock  Forfeited  for  Failure  to 
Pay  Assessment — Accounting  Methods  Covering  Every  Con-- 
tingency — Increasing  Capital  Stock  and  Issuing  Shares 
Against  Assessments  Previously  Paid. 


762.  Having  levied  an  assessment  according  to  law,  what 
are  the  proper  entries  to  make  of  it  on  the  general  and  aux- 
iliary books  of  a  corporation  ? 

763.  The  entries  to  make  depend  upon  the  circumstances 
governing  the  levy  of  the  assessment.  In  most  states  the  stock 
can  be  assessed  only  up  to  its  par  value ;  and  in  others  like  Cali- 
fornia, it  may  be  assessed  after  it  is  fully  paid  up.  In  all  cases 
where  the  assessments  are  not  paid,  so  much  of  the  stock  as 
shall  be  necessary  to  raise  sufficient  money  to  pay  the  assess- 
ments and  all  incidental  costs  thereto,  shall  be  sold,  and  such 
number  of  shares  transferred  to  the  purchaser.  In  California, 
if  no  bidders  appear,  the  stock  can  be  bid  in  by  the  corporation 
through  one  of  its  officers,  and  thereby  forfeited.  In  Delaware, 
if  no  one  appears  to  bid  in  the  stock  for  the  amount  of  the  as- 
sessment and  costs,  and  the  amount  can  not  be  recovered  by 
an  action  at  law  within  one  year,  the  stock  and  all  payments 
which  have  been  made  thereon  shall  be  forfeited.  In  New 
Jersey  the  Statute  is  silent  on  this  subject. 

764.  The  first  thing  to  do  when  an  assessment  has  been 
levied  is  to  procure  an  Assessment  Book  something  similar  in 


AND   CORPORATION   LAW 


277 


design  to  the  form  here  presented.  Enter  therein  the  names  of 
all  the  stockholders  either  alphabetically,  or  in  the  order  in 
which  they  appear  in  the  Stock  Ledger,  and  follow  out  the 
form  with  the  number  of  shares,  amount  of  assessment,  etc. 


765. 


ASSESSEMENT  BOOK. 


Assessment  No. 
Delinquent  .    . . . 


..of. per  Share. 

/ 


Levied /. 

Day  of  Sale /. 


Names 


Cert.  No.   No.  Shs.     Amount 


Total 


Date  of 
Paymenlt 


"j^^.  This  book  gives  a  complete  record  of  the  assessment; 
it  shows  who  have  paid  and  who  have  not,  and  from  it  the  De- 
linquent Sale  Notice  is  made  up.  The  costs  can  be  pro-rated 
among  the  delinquents  and  entered  in  the  "Costs"  column,  and 
the  assessment  and  costs'  extended  into  the  "Total"  column; 
and  whoever  offers  the  stock  for  sale  can  find  out  from  this 
the  total  costs  against  it,  also  the  costs  can  be  journalized  from, 
this.  If  it  is  desired,  every  alternate  page  may  be  left  blank 
for  the  purpose  of  filing  the  publishers'  affidavits  and  the  auc- 
tioneers'. Having  filled  in  this  book,  the  assessment  may  be 
treated  on  the  books  in  any  one  of  the  following  ways : 

y^y.  If  the  stock  is  not  fully  paid  up  and  the  Capital  Stock 
Account  is  credited  with  only  the  paid-up  capital,  debit  an  ac- 
count called  "Assessment  No.  i,"  and  credit  Capital  Stock  Ac- 
count with  the  amount  of  the  assessment  thus : 


768. 


Dr.  $ 


Assessment  No.  i 

To  Capital  Stock  $ 

For  Assessment,  of.  . .  .%  on  the  subscribed  capital  made, 
and  payable,  as  per  resolution  of  the  board  of  directors  minute 
book,  page 

769.  Enter  the  names  of  stockholders  on  Assessment  Ac- 
count, and  credit  them  as  they  pay  their  assessments.  When 
all  have  paid,  the  paid-up  capital  shall  have  been  increased  by 
the  amount  of  the  assessment. 


278  CORPOEATION  ACCOUNTING 

770.  If  any  of  the  stockholders  fail  to  pay  their  assess- 
ments and  the  stock  has  to  be  sold,  Debit  "Assessment  Ex- 
pense No.  i"  with  all  costs  incident  to  the  assessment  and  sale, 
and  when  the  purchaser  pays  over  the  money,  credit  "Assess- 
ment No.  i"  with  the  amount  of  the  assessment,  and  "Assess- 
ment Expense"  with  the  amount  of  the  expense,  these  entries 
will  balance  both  accounts.  Make  the  latter  entries  both  on 
the  Assessment  Account  and  Assessment  Book  in  red  ink,  to 
show  that  the  payment  was  not  regularly  or  ordinarily  made ; 
then  transfer  the  stock  to  the  purchaser,  who  acquires  all  the 
equites  the  original  holder  had,  or  would  have,  if  he  had  paid 
the  assessment. 

771.  Suppose  now  that  only  a  portion  of  the  shares'  were 
sold  to  pay  the  delinquent  assessment.  For  instance,  let  us  say 
that  A  has  100  shares  of  stock  at  $10  per  share  on  which  he 
has  paid  25%,  or  $250.  An  assessment  of  25%,  or  another 
$250,  is  levied,  and  A  failing  to  pay  this  assessment,  B  bids  in 
60  shares  for  the  assessment  and  costs;  that  is",  he  offers  to 
pay  the  assessment  and  costs  on  the  100  shares  for  the  transfer 
to  him  of  60  shares.  What  would  be  the  method  of  treating 
this'  transaction?  Credit  A's  stock  with  the  payment  of  the 
assessment,  and  Expense  with  the  payment  of  the  expense, 
then  issue  to  B  a  certificate  for  60  shares — 50%  paid-up  (or 
other  evidence  of  his  equity),  and  issue  to  A  a  like  evidence 
for  40  shares — 50%  paid-up.  Now  why  do  we  do  this  ?  A  has 
100  shares  of  stock  on  which  he  has  paid  $2.50  per  share.  The 
Company  wants  an  additional  $2.50  per  share.  B  pays  that 
$2.50  per  share  on  100  shares,  or  $250,  in  consideration  of  60 
shares  of  stock;  he  gets  his  60  shares  for  $250  plus  the  costs, 
that  is',  it  has  cost  him  $4.16  2-3  per  share  and  costs;  it  has 
cost  the  other  stockholders  $5.00  per  share.  Now  we  see  that 
B  has  got  his  stock  cheaper  than  the  original  subscribers, 
but  the  Company  has  received  its  assessment  and  costs,  and 
is'  out  nothing — the  loser  is  A,  the  man  who  failed  to  pay  his 
assessment;  but  he  didn't  lose  All;  B  paid  his  assessment  for 
his  equity  in  60  shares,  that  leaves  A  entitled  to  40  shares,  and 
as  B  has  paid  the  full  assessment,  these  40  shares  have  the 
-same  equitable  value  as  the  others.  Now  we  have  seen  that 
A  paid  $250  in  the  first  place,  and  he  has  now  a  50%  equity  in 
40  shares,  which  amounts  to  $200;  hence  he  has  lost  $50  by 
reason  of  his  failure  to  pay  the  assessment;  but  inasmuch  as 
the  Company  has  not  lost  anything,  we  have  another  reason 
why  he  should  not  be  further  penalized,  and  why  he  is  entitled 
to  the  40  shares  on  the  same  basis  as  the  other  stockholders. 


AND   CORPORATION   LAW  27&^ 

772.  Now  suppose  that  neither  of  the  foregoing  conditions 
prevailed,  and  that  there  was  no  one  to  buy  in  the  stock,  either 
in  whole  or  in  part,  for  the  assessment  and  costs,  and  that  it 
was  forfeited  to  the  Company,  what  would  be  the  entries  ? 

773.  First  Entry. 

Capital  Stock  $250 

To  Assessment  No.  i  $250 

John  Smith  fails  to  pay  assessment  previously  credited  to 
Capital  Stock. 

773  (a)  This  entry  will  balance  the  Assessment  Account 
and  reduce  Capital  Stock  to  its  paid-up  value. 

774.  Second  Entry. 

Treasury  Stock  Dr.  $250 

To  Surplus  Account  $250 

John  Smith  forfeits  the  equivalent  of  25  shares  of  paid-up 
stock,  for  failure  to  pay  assessment. 

774  (a)  This  entry  shows  25  shares  of  Treasury  on  hand — 
stock  once  paid  for,  and  that  there  is  added  to  Surplus  the 
amount  that  Smith  paid  and  forfeited. 

775.  Third  Entry. 

Surplus  Account  Dr.  $? 

To  Assessment  Expense  No.  i  $? 

for  expense  connected  with  advertising  Smith's  stock  for  sale. 

775  (a)  This  entry  balances  Assessment  Expense  and  re- 
duces Surplus  Account  to  the  actual  Capital  gain  on  the  for-^ 
feiture.  In  this'  case  the  delinquent  stockholder  loses  all  his 
stock,  because  the  Company  loses  the  subscription;  and  the 
Company  is  damaged  thereby,  inasmuch  as  there  is  no  one  to 
take  up  where  he  left  ofif. 

"jy^y.     Alternative  Entry. 

Forfeited  Shares  Account  $1000 

To  John  Smith  $750 

To  Surplus  Account  250 

John  Smith  forfeits  100  shares  of  stock  on  which  he  paid 
first  instalment  of  25%. 


280  CORPORATION   ACCOUNTING 

jyj.     This  forfeited  stock  could  be  offered  for  sale  at  a  dis- 
count of  259^.   Vide  paragraph  689  et  seq.,  chapter  XV. 

When  Stock  is  Fully  Paid-up. 

778.  In  this,  and  some  other  states,  an  assessment  may  be 
levied  on  paid-up  stock  for  the  purpose  of  paying  a  corpora- 
tion's debts,  or  for  making  necessary  improvements,  and  it  does 
not  appear  that  there  would  be  anything  wrong  in  the  stock- 
holders of  any  corporation  consenting  to  a  voluntary  assess- 
ment for  the  purpose  of  acquiring  either  necessary  capital  or  a 
surplus.  In  such  cases,  or  under  such  conditions,  any  one  of 
the  following  methods  may  be  applied : 

First  Method. 

779.  Debit  individual  stockholders  for  the  amount  of  their 
respective  assessments',  and  credit  Assessment  Account  for  the 
aggregate.  The  two-fold  object  of  this  form  of  entry  is  to  show 
the  amount  levied  in  assessments,  and  to  show  who  paid  and 
who  failed  to  pay  the  assessments.  For  the  latter,  the  Assess- 
ment Book  shows  all  the  particulars,  but  some  insist  on  it  ap- 
pearing on  the  Ledger ;  besides  delinquents  are  to  be  charged 
with  the  cost  of  advertising  and  expenses  of  the  sale,  and  as' 
these  costs  and  the  delinquent  assessments  are  to  be  paid  by 
the  parties  purchasing  the  stock,  the  accounts  of  delinquents 

'.are  credited  through  the  Cash  Book  by  writing  the  names'  of 
the  purchasers  thereon ;  the  necessary  transfers  are  then  made 
on  the  Stock  Books,  and  the  incident  is  closed.  Assessment 
Account  remains  credited  with  the  amount  of  the  assessment 
until  the  books'  are  about  to  be  closed  when  it  is  written  off 
into  Surplus  Account  as  a  Capital  Accretion.*^ 

780.  Note — One  collective  account  might  be  opened  for 
all  the  stockholders,  headed  Stockholders  Assessment  Account, 
and  two  lines  allotted  to  each  Stockholder,  one  for  the  amount 
of  assessment,  and  one  for  costs  if  necessary;  this  would  be 
very  much  less  trouble  than  opening  and  indexing  individual 
accounts. 

Second  Method. 

781.  Debit  same  as  above,  and  credit  the  assessment  under 
the  heading  "New  Working  Capital,"*^  and  allow  this  to  stand 
on  the  books  as  a  Capital  Liability,*^  and  if  ever  the  capital 

*Vide  paragraph  447. 

*Vide  paragraph  830,  et  seq. 

*Vide  paragraph  448.  . 


AND   CORPOEATION    LAW 


281 


stock  is  increased,  dispose  of  assessments  by  .the  following 
entry : 


782. 


Dr.  $. 


New  Working  Capital 

To  Capital  Stock  $ 

For shares  of  paid-up  stock  issued  to  the  stockholders 

in  proportion  to  their  holdings,  this  being  the  amount  of  as- 
sessments paid  over  the  par  value  of  the  stock. 

783.  This  amounts  to  refunding  in  the  shape  of  stock,  all 
that  the  stockholders  have  paid  in  the  way  of  assessments. 
This  method  is  to  be  recommended  where  there  is  a  probability 
of  the  stock  being  increased. 

Third  Method. 

784.  Make  no  entry  on  the  books  at  the  time  the  assess- 
ment is  levied,  but  credit  each  on  individual  account  for  the 
amount  they  pay,  also  on  the  Stock  Ledger  if  it  has  money 
columns,*  writing  on  their  accounts  at  the  time  "Assessment 
No.  i"  and  so  on.  Then  if  the  capital  stock  is  increased,  debit 
them  for  an  amount  equal  to  the  amount  they  have  paid  in  as- 
sessments and  credit  Capital  Stock  for  the  aggregate.  Issue 
each  one  the  stock  they  are  entitled  to,  and  make  the  proper 
entries  on  the  Stock  Books.  While  this  may  serve  the  purpose 
of  bookkeeping  it  is  not  good  ethics,  nor  correct  accounting. 
The  financial  books  do  not  show  that  an  assessment  has  been 
collected  or  even  levied,  but  show  a  certain  amount  of  advances 
or  private  loans  by  the  stockholders.  These  appear  on  the 
books  as  liabilities,  when  as  a  matter  of  fact,  the  Company  is 
not  obliged  to  pay  them.'''^ 

Fourth  Method. 

785.  Rule  a  special  column  in  the  Cash  Book  for  the  pur- 
pose of  entering  all  sums  collected  on  assessments;  explain 
each  entry  and  carry  the  total  forward  until  the  end  of  the 
month,  at  which  time  credit  Assessment  Account  or  Working 
Capital. 


786. 

Dr.     Cash  Book  With  Special  Assessment  Column. 

Date 

Name 

Particulars 

Assess- 
ment 

Folio 

V 
V 

Misc. 

Total 

Nov. 

1 

10 

John  Smith 
John  Jones 

10  per  ct.  on  10  Shs, 
10  per  ct.  on  50  Shs. 

20 
20 

00 
00 

*Vide  paragraphs  286  and  287. 
*2Vide  paragraphs  290  and  292. 


282 


CORPORATION   ACCOUNTING 
Fifth  Method. 


787.     Make  no  entry  until  the  full  assessment  is  collected, 
when  one  entry  like  the  following  is  made  in  the  Cash  Book : 


Assessment  Account       $20,000 

For  Assessment  No.  i  of  10 

per  cent  on  the  Capital 

Stock. 
See  Minute  Book,  etc. 


788.  As  assessments  of  this  kind  are  levied  for  the  pur- 
pose of  paying  debts  or  furnishing  additional  Working  Capital, 
the  account  of  credit  may  be  called  Working  Capital  instead 
of  Assessment  Account;  however,  that  is'  merely  a  choice  of 
terms.  Some  accountants  dispose  of  the  credit  on  this  account 
by  charging  it  with  all  sums  drawn  out  for  any  purpose  and 
then  debiting  the  account  for  which  they  are  drawn,  and  credit- 
ing profit  and  loss  with  the  amount,  e.  g.  Suppose  that  $1000 
was  drawn  out  for  the  purpose  of  buying  machinery,  here 
would  be  the  entries : 


789. 


Cash  Book. 


Cr. 


Working  Capital  $1,000 

Amount  drawn  out  to 
purchase  Machinery. 


790.  Journal. 

Machinery  Account 

To  Profit  and  Loss 
(With  explanations.) 


Dr.  $1,000 


$1,000 


791.  This  method  may  be  said  to  be  faulty  in  its  premise 
and  false  in  its  conclusion.  The  assessments  usually  string  out 
over  a  period  of  30  days,  and  as  they  come  in  they  should  ap- 
pear in  the  Cash  Book.  Keeping  memoranda  is  not  keeping 
books.  If  the  money  collected  is  put  into  the  cash  and  not  on 
the  Cash  Book,  cash  will  not  balance ;  and  if  it  is  withheld  out 
of  the  cash  it  is  positively  wrong,  and  should  not  be  tolerated. 
In  the  next  place.  Profit  and  Loss  should  not  be  credited  with 


AND   CORPORATION   LAW  283 

an  accretion  of  capital  like  this.*  It  is  no  part  of  the  profits 
earned,  as  so  often  explained.  In  the  third  place,  the  method 
of  charging  withdrawals  to  Working  Capital  is  wrong  in  prin- 
ciple and  round-about  in  practice.  It  is,  as  will  be  seen  mak- 
ing work  for  no  good  purpose,  a  practice  that  should  never  be 
indulged  in.  As  a  matter  of  fact  nothing  has  been  given  in 
exchange  for  the  cash  received  on  assessments,  and  the  whole 
amount  will  finally  go  to  the  credit  of  Surplus,*^  but  there  is  no 
necessity  for  it  going  in  piece-meal.  The  money  drawn  for 
each  account  should  be  drawn  from  the  cash  without  any  refer- 
ence to  Assessment  or  Working  Capital,  and  Surplus  credited 
for  the  full  amount  at  the  closing  of  the  books  as  shown  in  the 
first  method. 

Note : — The  exception  to  this  is  of  course  where  the  assess- 
ment is  treated  as  a  liability,  as  shown  in  second  and  third 
methods. 


CHAPTER  XXIII. 


A  Corporation  Bids  in  Its  Own  Stock  at  a  Delinquent  Sale 
— Entries  Showing  Reversion  of  Stock  to  Corporation — Pay- 
ing the  Costs  and  Accounting  for  Same — Two  Different 
Methods  of  Recording  the  Purchase — Purchased  Stock  Dis- 
tributed as  a  Dividend. 


792.  A  California  mining  company  having  purchased  a 
number  of  shares  of  its  own  stock  at  a  delinquent  assessment 
sale,  the  par  value  of  which  had  previously  been  paid,  wishes 
to  distribute  the  same  among  its  stockholders,  what  are  the 
entries  and  what  the  procedure? 

793.  After  the  stock  is  bid  in  by  the  company  ,the  first 
thing  to  do  is  to  make  the  entries  showing  the  reversion  of  the 
stock  to  the  company  and  its  title  thereto.  The  next  thing  is 
to  show  the  cost  of  acquiring  the  stock  by  purchase;  that  is, 
the  costs  of  advertising  and  expenses  of  sale  apportionable  to 
the  shares  bid  in. 

*Vide  paragraph  308. 
*2Vide  paragraph  835. 


284  CORPORATION  ACCOUNTING 

Entries  for  the  Purchase  of  a  Company's  Own  Stock. 

794.  Sujipose  that  John  Brown  owns  10  shares  of  stock  at 
$10  per  share  and  it  is  sold  to  pay  a  dehnquent  assessment  of 
10%  and  the  cost  of  advertising,  etc.,  which  amount  to  an  ad- 
ditional $10,  and  the  company  is  the  purchaser,  what  are  the 
entries  ? 

795.  First,  debit  Brown  with  amount  of  assessment,  cred- 
iting Working  Capital  or  Assessment  Account.  Then  debit 
him  with  costs,  crediting  Delinquent  Assessment  Expense,  or 
in  this  way : 

796.  John  Brown  Dr.  $20.00 

To  Working  Capital  $10.00 

To  Delinquent  Assessment  10.00 

For  assessment  of  10%  on  10  shares,  and  costs  of  selling 
stock  for  failure  to  pay  assessment. 

If  there  are  a  number  of  delinquents,  open  an  account  in 
Petty  Ledger  form,  allowing  two  lines  to  each  name,  one  for 
assessment,  the  other  for  costs. 

797.  Second  Entry. 

Treasury  Stock  Dr.  $100 

To  Surplus  Account  $100 

The  company  bids  in  John  Brown's  certificate  for  10  shares 
at  delinquent  sale  and  places  it  in  the  Treasury.  See  minute 
hook,  page 

798.  Third  Entry. 

Surplus  Account  Dr.  $20 

To  John  Brown  $20 

For  assessment  and  costs  paid  by  the  company. 

The  company  now  pays  the  costs  connected  with  the  de- 
linquent sale,  and  the  following  entry  is  made  in  the  Cash 
Book. 

799.  Fourth  Entry. 


Delinquent  Assessment  Exp.  $10 

For  exp.  attached  to  sale 
of  John  Brown's  Stock. 


AND   CORPORATION   LAW  285 

800.  Now  there  is  one  apparent  discrepancy  left.  Working 
Capital  is  credited  with  $10  which  was  not  really  received,  and 
Surplus  Account  is  debited  with  $10  more  than  was  actually 
paid  out;  but  when  the  Working  Capital  Account  is  closed 
into  the  Surplus  Account,  it  again  receives  credit  for  this  $10 
with  which  it  was  charged  in  closing  out  Brown's  account, 
and  the  nominal  gain  to  the  company  on  this  sale  is  $90.  If 
this  treasury  stock  was  sold,  the  actual  gain  to  the  company 
would  be  what  it  sold  for  less  $10. 

800  (a).  While  the  foregoing  method  is  detailed  it  is  also 
very  round-about,  so  we  seek  a  shorter  way  in  the 

Second  Method. 

801.  Make  no  credit  to  Working  Capital  or  Assessment 
Account  for  the  amount  that  has  gone  delinquent,  but  when 
the  costs  and  expenses  of  sale  are  ascertained  make  this  entry 
and  explanation : 

802.  CASH  BOOK. 


Delinquent  Assmt.  Exp.      $10 

The  company  buys  Brown's 
10  shares  at  delinquent 
sale,  paying  costs  against 


same. 


803.     Second  Entry. 

Treasury  Stock  Dr.  $100 

To  Delinquent  Assmt.  Exp.  $10 

To  Surplus  Account  90 

The  company  purchases,  for  costs  and  expenses  John 
Brown's  stock,  placing  same  in  the  Treasury.  See  Record  of 
Sale,  minute  book  page et  seq. 

803  (a).  This  entry  balances  Delinquent  Assessment  Ex- 
pense, shows  the  company  possessed  of  $100  treasury  stock, 
and  shows  a  nominal  gain  of  $90  in  the  Surplus  Account,  the 
company  having  acquired  $100  worth  of  stock  for  $10.  This 
case  is,  of  course,  far  fetched,  but  it  illustrates  in  an  easy  man- 
ner the  way  to  record  the  purchases  of  a  company's  own  stock 
bid  in  at  a  delinquent  sale. 


286  CORPOEATION  ACCOUNTING 

804.  After  these  entries  have  been  made  on  the  financial 
books,  the  stock  is  transferred  on  the  Stock  Ledger,  and  the 
company  having  acquired  title  to  it  is  prepared  to  dispose  of 
it  again. 

A  petition  and  resolution  similar  to  that  outlined  in  Chap- 
ter XXIV  is  now  prepared  and  passed,  the  stock  pro-rated  and 
issued  to  the  stockholders.  The  entries  for  the  re-issue  are 
also  illustrated  in  Chapter  XXIV,  this  stock  being  distributed 
as  a  stock  dividend. 

805.  N.  B. — The  first  and  third  entries  in  the  first  method 
are  supposed  to  comply  with  the  literal  meaning  of  the  Cali- 
fornia Code  on  this  subject,  which  reads,  "and  the  amount  of 
the  assessment,  costs,  and  charges  due,  must  be  credited  as 
paid  in  full  on  the  books  of  the  company." 


CHAPTER  XXIV. 


A  Going  Corporation  Buys  a  Patent  for  $10,000  Cash  and 
a  One-fifth  Interest  in  Its  Paid-up  Stock — Stockholders  Have 
Option  of  Transferring  One-fifth  of  Their  Holdings,  or  Issuing 
Unsubscribed  Stock  to  the  Patentee  in  an  Amount  Which 
Shall  Give  Them  a  One-fifth  Interest— Four  Methods  of  Mak- 
ing the  Entries — Pro-rating  the  Unsubscribed  Stock  Among 
Existing  Stockholders — Distribution  of  Stock  vs.  Stock  Divi- 
dend— Bonus  Account  and  How  to  Dispose  of  It. 


806.  The  Occidental  Gas  and  Electric  Light  Company  has 
an  authorized  capital  of  $75,000,  and  a  paid-up  capital  of  $50,- 
000,  and  E.  L.  Lighter  owns  a  patent  on  a  combination  Gas 
and  Electric  Stove  which  he  sells  to  them  for  $10,000  and  a 
one-fifth  interest  in  the  company;  what  entries? 

807.  The  first  thing  to  be  decided  is  how  he  is  to  obtain 
the  one-fifth  interest.  He  may  obtain  it  by  the  old  stockhold- 
ers transferring  to  him  one-fifth  of  the  stock  which  they  hold, 
that  is  $10,000  worth;  he  would  then  have  one-fifth  of  the 
present  paid-up  capital ;  or  he  might  receive  $12,500  of  the  un- 
sold or  treasury  stock — in  either  case  he  would  have  one-fifth 


AND   CORPORATION   LAW  287 

of  the  paid-up  stock,  and  the  old  stockholders  would  have 
four-fifths.  If  he  obtained  it  by  the  first  process,  the  old  stock- 
holders, and  not  the  company  as  an  artificial  person,  would  be 
theoretically  paying  for  what  the  patent  cost  in  excess  of  the 
$10,000  cash;  but  inasmuch  as  they  would  have  four-fifths  of 
the  paid-up  capital  in  either  case,  it  would  make  no  material 
difference  as  long  as  the  paid-up  capital  was  not  increased; 
but  if  it  were  increased  to  $75,000,  their  original  interest  would 
be  reduced  to  8-15  instead  of  2-3,  which  would  make  a  differ- 
ence in  their  share  of  the  dividend.  In  the  first  case  the  stock 
would  be  transferred  to  Lighter  in  the  usual  way  of  making 
transfers  and  the  following  entry  made  on  the  Cash  Book : 

808.  CASH  BOOK. 


Patent  Right  $10,000 

Paid  E.  L.  Lighter 
for  assignment  of 
his  patent  on  com- 
bination G.  &  L. 
Stove. 


Second  Method. 

809.  If  obtained  by  the  second  and  more  likely  process, 
the  following  entry  could  be  made  in  the  Journal. 

Patent  Right  Dr.  $22,500 

To  Treasury  Stock  $12,500 

To  E.  L.  Lighter  10,000 

For  Patent  Right  purchased  from  E.  L.  Lighter,  to  be  paid 
for  in  $12,500  worth  of  treasury  stock  and  $10,000  cash. 

810.  Open  an  account  with  Lighter  in  the  Stock  Ledger, 
issue  the  stock  to  him,  then  pay  him  the  cash,  debiting  his  ac- 
count in  the  General  Ledger  and  crediting  cash  in  the  Cash 
Book,  and  the  incident  is  closed. 

Third  Method. 

811.  First  Journal  Entry. 

Patent  Right  Dr.  $22,500 

To  E.  L.  Lighter  $22,500 

(With  explanations  as  in  previous  entry) 


288  CORPORATION  ACCOUNTING 

8 1 2.  Second  Journal  Entry. 

E.  L.  Lighter  Dr.  $12,500 

To  Unsubscribed  Treasury  Stock     $12,500 
For  stock  issued  to  Lighter  in  part  payment  for  his  patent 
right. 

813.  Dr.  CASH   BOOK.  Cr. 


E.  L.  Lighter  $10,000 

Cash  balance  on  his 
patent  right. 


Fourth  Method. 

814.  Journal  Entry. 

Patent  Right  Dr.  $12,500 

To  Unsubscribed  Treasury  Stock      $12,500 

For shares  of  Unsubscribed  Treasury  Stock  issued 

to  E.  L.  Lighter  as  part  payment  for  his  patent,  per  resolution 
of  the  Board  of  Directors,  etc. 

815.  CASH  BOOK. 


Patent  Right  $10,000 

Paid  E.  L.  Lighter 
balance  on  his  pat- 
ent, per  etc. 


816.  There  are  now  12,500  shares  of  unsold  or  unsub- 
scribed treasury  stock  in  the  company,  and  the  directors  decide 
at  the  end  of  the  year  to  distribute  this  stock  among  the  pres- 
ent stockholders ;  accordingly  they  prepare  a  petition  similar 
in  form  and  substance  to  the  following : 

817.  Date 

To  the  Board  of  Directors  of  the  Occidental  Gas  and  Elec- 
tric Light  Company. 
Gentlemen : — 

We,  the  undersigned,  being  all  of  the  stockholders  of  the 
O.  G.  &  E.  L.  Company,  do  hereby  petition  and  request  that 
the  Board  of  Directors  resolve    and    decree   that   the    unsub- 


AND   CORPORATION   LAvV  -  28» 

scribed  treasury  stock  of  the  company  amounting  to  $12,500, 
or  16  2-3  per  cent  of  the  capital,  be  distributed  among  the  pres- 
ent stockholders  of  record  in  proportion  to  the  shares  held  by 
each.       Signed, 


Then  follows  Notary's  Certificate. 

818.  The  petition  is  brought  up  at  a  subsequent  directors 
meeting,  and  a  resolution  to  the  above  effect  is  adopted ;  after 
which  the  stock  is  distributed  as  ordered. 

819.  This'  is  not  a  stock  dividend,  and  should  not  be 
treated  on  the  general  books  as  such.  As  no  exchange  of  value 
is  received  for  the  stock,  a  nominal  account  could  be  opened 
to  balance  the  unsubscribed  Treasury  Stock  Account.  For 
example : 

820.  Bonus  Dr.  $12,500 

To  Unsubscribed  Treasury  Stock     $12,500 
Unsubscribed  treasury  stock  distributed  among  the  stock- 
holders per  resolution,  etc. 

820  (a).  As  this  Bonus  Account  would  either  have  to  be 
carried  as  an  asset  (which  it  is  not),  or  carried  into  Profit  and 
Loss  or  Surplus  Account  (which  would  reduce  the  assets  and 
amount  to  declaring  a  dividend)  a  way  must  be  found  by 
which  the  stock  can  be  distributed  without  impairing  the 
assets. 

821.  First  Way. 

Patent  Right  Dr.  $12,500 

To  Unsubscribed  Treasury  Stock     $12,500 
Unsubscribed   Treasury   Stock    distributed   among   stock- 
holders on  account  of  increased  value  of  Patent  Right. 

822.  Second  Way. 

Appraise  or  inventory  Patent  Right  for  $12,500  more  than 
it  stands  on  the  books',  close  the  books,  then  Profit  and  Loss 
will  show  an  additional  gain  in  proportion  to  the  increased 
value  of  Patent  Right;  then  debit  Profit  and  Loss  and  credit 
Unsubscribed  Treasury  Stock  and  make  the  proper  explana- 
tion. 

823.  Profit  and  Loss  Dr.  $12,500 

To  Unsubscribed  Treasury  Stock     $12,500 
Increase  in  profits  (due  to  increase  in  value  of  Patent)  ap- 


290  CORPORATION  ACCOUNTING 

plied  to  the  payment  of  unsubscribed  treasury  stock,  and  stock 
pro-rated  among  stockholders,  as  per  petition  and  resolution 
etc. 

824.  Note — In  this  way  the  extraordinary  gain  credited 
to  Profit  and  Loss  shall  have  been  immediately  charged  out 
of  it,  and  will  not  show  in  the  profits  of  the  period. 

Concerning  Stockholders  Liability. 

825.  This  is  another  one  of  those  cases  where  action 
should  be  taken  only  on  the  advice  of  an  attorney.  The  book- 
keeping part  of  it  is  easily  adjusted,  as  we  have  seen;  but  here 
is  involved  one  of  those  fine  points  of  legal  jurisprudence  con- 
cerning the  stockholders  liability — whether  or  not  the  stock- 
holders have  paid  for  their  stock,  and  whether  they  are  still 
liable  to  pay  for  it.  One  thing  appears  certain,  unless  the  in- 
crease in  the  asset  value  of  Patent  Right  was  justified  by  facts 
and  conditions,  they  have  not  paid  for  their  stock  by  a  mere 
trick  in  bookkeeping.  If  it  was  justified,  it  would  be  better 
to  distribute  the  stock  as  a  stock  dividend  thus : 

826.  Patent  Right  Dr.  $12,500 

To  Surplus  Account  $12,500 

For  increase  in  Surplus,  due  to  increase  in  value  of  Patent 
right. 

827.  Surplus  Account  $12,500 

To  Dividend  Account  $12,500 

Dividend  of  20%  on  outstanding  capital  payable  in  unsub- 
scribed treasury  stock. 

828.  Dividend  Account  Dr  $.12,500 

To  Unsubscribed  Treasury  Stock    $12,500 
Unsubscribed  stock  distributed  as  a  dividend,  per  resolu- 
tion, etc. 

829.  The  merit  in  the  last  method  lies  in  this :  The  di- 
rectors are  authorized  to  pay  dividends  out  of  the  surplus,  and 
if  this  surplus  is  an  actuality  and  not  a  myth,  they  would  be 
acting  within  their  powers  in  paying  a  dividend;  and  if  they 
decide  to  pay  the  dividend  in  stock  instead  of  in  cash,  they  will 
be  strengthening  the  company  to  the  extent  that  they  do  not 
impair  its  cash  assets  in  the  payment  of  the  dividend.  The 
test  to  be  applied  in  this  case  is :  Has  the  collateral  value  of 
the  patent  increased  to  the  extent  claimed? 


CHAPTER   XXV. 

A  Thesis  on  "Working  Capital"— Various  Ways  of  Treat- 
ing Working  Capital  Acocunt — Divergent  Opinions  on  the 
Subject— How  to  Close  This  Account  and  Why — Some  Ele- 
mentary Principles  Expounded. 


830.  A  company  whose  capital  stock  has  been  fully  sub- 
scribed and  paid  for  by  the  incorporators.  (See  chapter  XV), 
is  in  need  of  additional  funds  for  working  capital,  and  in  order 
to  raise  the  necessary  funds,  the  stockholders  transfer  to  the 
company  a  certain  number  of  shares  each,  to  be  sold  for  the 
purpose  of  obtaining  the  desired  working  capital.  What  entry 
should  be  made  at  the  time  of  such  transfer?  Why  should  this 
entry  be  made  and  what  are  the  subsequent  entries? 

831.  The  proper  entry  to  make  on  the  transfer  of  the  stock 
to  the  company  would  be 

Treasury  Stock  Dr.  $ 

To  Working  Capital  $ 


831  (a).  The  reason  for  this  entry  (as  explained  in  the 
definition  of  treasury  stock)  is,  (a)  there  has  been  received 
into  the  Treasury  of  the  company,  something  of  value  for 
which  no  exchange  has  been  given ;  (b)  stock  once  issued  and 
paid  for  is  regarded  as  outstanding  stock;  hence  this  transfer 
should  be  debited  to  Treasury  Stock  Account,  and  not  to  Cap- 
ital Stock  Account,  because  to  debit  the  latter  would  be  to  re- 
duce the  paid-up  capital,  something  which  can  only  be  done 
by  the  authority  of  the  State;  (c),  once  the  Capital  of  a  com- 
pany is  issued  it  becomes  fixed,  and  the  liability  existing 
against  it,  both  as  to  stockholders  and  creditors,  is  also  fixed ; 
and  no  transfer  to  the  company  would  relieve  a  stockholder 
from  liability  to  creditors  where  that  liability  exists,  and  that 
liability  may  exist  (i),  where  a  stockholder  in  a  limited  lia- 
bility company  has  received  his  stock  for  a  nominal  or  insuffi- 
cient consideration  to  the  injury  of  the  creditors;  (2),  in  an 
equitable  or  full  liability  company,  where  the  stockholders  are 
liable  to  creditors  for  the  debts,  or  a  portion  of  the  debts,  in 
excess  of  the  par  value  of  the  stock;  (d),  to  debit  Capital  Stock 


292  CORPORATION   ACCOUNTING 

with  the  shares  surrendered  and  credit  it  with  subsequent 
sales,  would  show  a  varying  condition  in  the  capital  stock  of 
the  company,  and  would  not  accord  with  the  facts'. 

832.  The  subsequent  entries  to  make  would  be,  credit 
Treasury  Stock  Account  for  Sales,  and  close  Working  Capital 
Account  into  Surplus  Account — even  if  the  treasury  stock  is 
not  all  sold.  If  any  loss  should  be  made  in  the  sale  of  this 
treasury  stock,  it  should  be  charged  to  Surplus  Account,  be- 
cause its  nominal  value,  (Working  Capital  Account)  was  cred- 
ited to  Surplus  as  a  Capital  Accretion. 

833.  Some  accountants  make  no  entry  of  the  surrendered 
stock  until  it  is  sold,  when  they  credit  Working  Capital  Ac- 
count. The  objection  to  this  is,  that  the  books  do  not  reveal 
the  exact  position  of  the  company,  viz. :  that  it  has  a  certain 
number  of  shares  of  treasury  stock  for  sale.  And  when  a  sale 
is  made,  it  is  necessary  to  explain  a  condition  that,  as  far  as 
the  financial  books  are  concerned,  does  not  exist;  and  further, 
it  is  only  by  delving  and  inquiry  that  one  can  learn  the  extent 
of  this  hidden  source  of  revenue.  This  treasury  stock  is  an  as- 
set, at  least  of  potential  value,  and  should  positively  appear 
on  the  books. 

834.  There  are  other  accountants  who  allow  this  Working 
Capital  Account  to  stand  on  the  books  of  the  company  until 
the  liquidation  of  the  company,  when  it  is  closed  into  Profit 
and  Loss  Account  as  a  gain ;  and  they  reason  thus  on  the  sub- 
ject :  "Since  the  proceeds  realized  on  the  sale  of  the  stock 
that  gave  to  Working  Capital  its  credit,  are  to  be  retained  and 
used  as  a  working  or  operating  capital,  the  account  should  not 
be  closed  when  a  dividend  is  declared,  but  should  remain  on 
the  books  as  a  credit  until  the  company  goes  into  liquidation.'^ 
Now  there  is  no  argument  in  this.  The  fact  that  an  account 
which  would  swell  the  surplus,  is  closed  before  declaring  a 
dividend,  does  not  demand  nor  imply  that  the  working  capital 
must  be  reduced  by  the  payment  of  an  enormous  dividend, 
simply  because  the  surplus  would  admit  of  it.  If  a  minimum 
standard  of  working  capital  is  fixed,  it  can  be  maintained 
without  fencing  it  in,  in  a  separate  account ;  however,  we  have 
no  quarrel  with  those  who  persist  in  making  Working  Capital 
Account,  in  season  and  out  of  season,  the  guardian  angel  of  a 
company's  stability.  But  while  it  may  be  "an  elementary 
principle  of  alienistic  practice  never  to  denounce  the  illusions 
of  the  patient,"  on  account  of  the  value  of  psychic  influence 
as  an  aid  to  medical  science,  we  can  not,  in  this  wise,  tacitly 
endorse  illusions  that  involve  the  fundamentals  of  bookkeep- 
ing.     It  is  an  elementary  principle  of  double  entry  bookkeep- 


AND   CORPORATION   LAW  293 

ing,  that  all  credits  are  either  liabilities  or  gains,  and  that  all 
accounts  representing  loss  and  gain  should  be  closed  out  at 
the  end  of  a  fiscal  period. 

835.  A  capital  gain  or  profit  should  be  closed  into  an  ac- 
count representing  net  capital;  and  a  trading  gain  should  be 
closed  into  an  account  representing  trading  profits.  Working 
Capital  in  this  instance  is  a  "Capital  Gain/'  because  it  is  out- 
side, and  independent  of,  trading  or  operating;  hence  it  should 
be  closed  into  Surplus  at  the  end  of  the  period. 

835  (a).  As  a  matter  of  fact  the  company  is  operating  on 
all  its  capital  invested,  and  not  merely  on  a  part  of  it ;  and  for 
the  reasons  given  in  a  preceding  chapter  and  the  ones  adduced 
here,  there  does  not  appear  to  be  any  logical  purpose  in  carry- 
ing Working  Capital  Account  along  year  after  year.  If  v^e 
accept  the  dogma  laid  down  in  the  foregoing  quotation  ''work- 
ing capital"  is  a  fixed  quantity,  and  must  remain  so  whether 
the  company  is  prosperous  or  insolvent.  Vide  paragraphs  308, 
309  and  310. 


CHAPTER   XXVI. 


Watering  Stock  to  Keep  Down  Dividends — Showing  How 
Stock  is  Increased  and  Profiits  Reduced — Net  Worth  of  Com- 
pany Not  Affected — Income  of  Stockholders  Not  Impaired  in 
the  Least — Nominal  Assets  and  Liabilities  as  Negatives. 


836.  As  previously  stated  in  this  work,  some  States  fix  or 
limit  the  profits  of  certain  public  service  corporations;  and  if 
they  make  a  profit  in  excess  of  the  limit  fixed,  they  are  required 
by  law  to  reduce  their  rates  or  charges — to  prevent  this  they 
water  their  stock.*  For  example,  a  railroad  company  or  street 
railway  company  with  a  capital  of  $10,000,000,  is  earning  a 
profit  of  9  per  cent,  when  the  limit  is  fixed  at  6  per  cent.  On' 
finding  this  out,  it  increases  its  Capital  Stock  to  $15,000,000, 
so  as  to  bring  its  earnings  within  the  limit  of  the  law;  and 

*Vide  paragraph  311. 


294  CORPORATION  ACCOUNTING 

then  it  distributes  this  stock  among  its  stockholders,  pro  rata, 
on  the  basis  of  shares  held  by  each.    What  entry? 

837.  "Franchise,"  or  "Right  of 

Way"  and  "Franchise"      $5,000,000  V 

To  Capital  Stock  $5,000,000 

For  increase  in  capital  stock  distributed  among  the  stock- 
holders per  resolution  of  the  Board  of  Directors.  See  page.  . .  . 
of  Minute  Book. 

838.  By  this"  entry  an  equal  amount  is  added  to  the  nomi- 
nal assets  and  liabilities  of  the  company  and  the  net  worth  of 
the  company  is  not  disturbed  in  the  least;  neither  are  the 
profits.  Instead  of  making  9  per  cent  on  $10,000,000,  they 
make  6  per  cent  on  $15,000,000,  which  is  the  same  thing.  Wa- 
tering stock  is  just  like  watering  milk.  As  in  the  latter  case  a 
milkman  dilutes  and  extends  his  supply  of  milk  so  as  to  have 
more  lacteal  fluid  for  sale ;  so  in  the  former  case  a  company 
dilutes  and  expands  its  capital  so  as  to  have  more  capital  stock 
for  distribution;  but  just  as  the  milkman  could  obtain  as  much 
butter  from  two  pints  of  pure  milk  as  from  three  pints  of 
watered  milk,  so  will  the  stockholders  receive  as  much  in  divi- 
dends from  two  shares  of  legitimate  stock  as  from  three  shares 
of  watered  stock. 

839.  This  is  another  instance  where  the  purpose  of  the 
law  is  defeated;  where  it  is  not  merely  disrespected,  but  con- 
temptiously  ridiculed.  If  these  corporations  were  made  the 
subject  of  investigation  by  honest  and  competent  public  ac- 
countants, this  method  of  issuing  stock  without  consideration 
would  soon  be  stopped;  and  laws  that  are  in  effect  dead  and 
inoperative,  would  become  active,  restraining  and  salutary. 
There  is  a  field  here  for  the  public  accountant,  and  if  nobody 
>else  will,  he  should  develop  it. 


CHAPTER  XXVII. 

A  Chapter  in  Trickery — One  of  the  Ways  in  Which  the 
Promoters  of  Speculative  Corporations  Obtain  Their  Stock 
at  a  Fraction  of  Its  Par  Value — How  the  Subsequent  Pur- 
chasers Who  Contribute  a  Majority  of  the  Capital  Own  Only 
a  Minority  of  the  Stock. 


840.  There  are  many  ways  by  which  the  promoters  of 
stock  companies  feather  their  own  nests,  so  to  speak,  at  the 
expense  of  stockholders.  Stockholders  are  often  aware  of  this, 
or  at  least  they  are  suspicious  of  it,  but  they  cannot  prove  it 
even  by  an  examination  of  the  books.  Indications  of  fraud 
may  be  plenty,  but  proof  there  is  none — so  neatly  and  so  skill- 
fully is  the  job  executed.  For  this  reason  people  should  not 
rush  into  speculative  corporations  without  knowing  something, 
about  them,  and  of  the  character  of  the  men  back  of  them. 
Here  is  one  of  the  simplest  methods  by  which  the  trick  is  done  : 

841.  Brown  has  some  oil  lands  which  are  worth  $5000,  he 
enters  into  a  private  understanding  with  Gray,  Black,  White 
and  Green  by  which  they  are  to  form  a  corporation  with  a 
capital  of  $50,000,  divided  into  50,000  shares  of  the  par  value 
of  $1  each.  Brown  is  to  receive  $35,000  worth  of  stock  for  his 
oil  lands,  or  seven  times  their  worth,  with  the  understanding 
that  he  is  to  transfer  to  his  associates  three  shares'  of  stock  for 
every  share  they  buy.  His  associates  then  purchase  1250 
shares  of  stock  each,  paying  cash  therefor,  and  Mr.  Brown 
thereupon  transfers  3750  shares  of  stock  to  each,  for  a  nominal 
consideration,  whereupon  they  have  5000  shares  each  at  a  cost 
of  $1250,  or  at  the  rate  of  25  cents  on  the  dollar.  After  trans- 
ferring the  stock  to  his  four  associates,  Mr.  Brown  has  left  just 
20,000  shares  for  his  $5000  worth  of  oil  lands,  so  that  he  too 
has  his  stock  at  25  cents  on  the  dollar.  Now  we  see  that  Brown 
received  35,000  shares  of  stock  and  that  the  other  four  pur- 
chased between  them  5000  shares,  this  leaves  a  balance  of  10, 
000  shares'  to  be  sold,  and  this  is  to  be  sold  at  par,  to  furnish 
working  capital — the  purchasers  paying  therefor  $10,000.  By 
this  arrangement  the  promoters  furnish  one-half  the  capital 
and  own  four-fifths  of  the  stock;  while  the  rest  of  the  stock- 


296  CORPORATION  ACCOUNTING 

'■» 

•  '■; 

holders  furnish  the  other  half  of  the  capital  and  own  only  one- 
fifth  of  the  stock.     The  transfer  of  the  stock  appears  on  th^ 
books  of  the  company  at  an  opportune  time,  'but  the  consid^f  '  -. 
eration  does  not  have  to  appear,  and  as  far  as  the  books  are    .• 
concerned  they  do  not  reveal  anything  fraudulent  in  the  trans-    ^ 
action.    Of  course  honest  men  will  not  engage  irl^this  kind  of  . 
business,  hence  the  admonition  in  the  beginning  of  this  para- 
graph— before  investing  in  any  of  those  schemes  where  they  ..^ 
have  "just  so  many  shares  of  stock  to  sell,"*  be  sure  you  in-   ; 
vestigate  the  value  of  the  property  against  which  the  stock  has  :\ 
been  issued,  as  well  as  the  men  back  of  the  enterprise ;  and  ^ 
later  on  you  will  not  find  out  that  you  have  oply  a  fifth  interest  *' 
in  a  business  for  which  you  furnished  one-half  of  the  capital. 
This  is  no  exaggerated  picture.    It  is  a  matter  oi  frequent  oc- 
currence, differing  only  in  extent,  ratio  of  inflation  and  method 
of  execution;  and  again  shows  the  necessity  of  State  super- 
vision over  this  class  of  corporations. 

842.  This  class  of  corporate  organization  is  sometimes 
called  a  two-floor  corporation — the  "ground  floor"  and  the 
"second  floor."  There  are  others  with  so  many  floors  that  you 
have  to  take  an  elevator  to  reach  the  top.  The  promoters  of 
these  corporations'  justify  this  on  two  grounds;  first,  that  they 
are  simply  capitalizing  the  future  profits,  and  that  inasmuch  as 
they  "saw  it  first,"  and  they  are  giving  outside  investors  an 
opportunity  to  make  a  fair  percentage  on  their  investment, 
they  are  doing  them  no  wrong;*  second,  that  as  the  pro^spects 
of  the  company  increase  the  value  of  its  stock  increases'.  This 
might  be  all  right  if  it  were  true,  but  a  company  that  is  so 
much  over  capitalized  can  not  make  a  fair  return  on  its  nom- 
inal capital ;  anyhow,  the  theories  of  large  profits  are  all  against 
the  top-floor  fellows ;  and  again,  the  increase  in  the  prospects 
of  a  new  company  is  mostly,  if  not  solely,  the  result  of  clever 
booming  and  advertising. 

*See  paragraph  313. 


CHAPTER  XXVIII: 

Stock  Purchased  and  Paid  for  in  Notes — Notes  Discovered 
to  be  Worthless — Stock  Held  as  Collateral  to  Secure  Notes — 
Securities  Declared  Forfeited — Stock  Resold — Who  Gets  the 
Dividend? 


843.  The  following  problem  appeared  in  the  query  column 
of  an  office  magazine  in  January  1902.  It  seems  that  nobody 
answered  it,  and  the  querist  sent  it  to  me  for  solution.  It  came 
from  Gainesville,  Texas. 

Corporation  Problem. 

844.  Editor  Home  Study:  Some  years  ago  a  company 
was  organized  with  what  they  called  and  treated  a  paid-up 
capital  of  $25,000  and  authorized  capital  of  $50,000.  This  $25,- 
000  was  paid  up  in  following  manner : 

A  put  in  mdse.  accts.  and  notes  to  amount  of  $1,500 

B  put  in  merchandise  to  the  amount  of  5,000 

C  gave  his  note  for  1,000 

D  gave  his  note  for  1,000 

E  gave  his  note  for  1,000 

F  gave  his  note  for  1,000 

G  gave  his  note  for  1,000 

845.  Stock  was  issued  to  each  of  these  $1,000  parties, 
which  stock  was  attached  as  collateral  security  to  said  notes 
with  an  agreement  by  which  they  were  to  pay  so  much  each 
month  on  notes.  Two  of  these  parties  failed  to  pay  for  their 
stock,  and  it  was  transferred  to  the  Company;  and  the  two 
notes  of  $1,000  not  being  worth  anything  were  charged  off  on 
the  loss  and  gain  account  at  annual  settlement  and  thus  the 
profits  of  the  concern  showed  up  less  by  $2,000  than  they 
should  have  been.  After  the  annual  meeting  a  party  came 
along  and  bought  the  $2,000  stock  which  had  been  returned 
to  the  Company.  What  entry  should  be  made?  Should  loss  and 
gain  account  be  credited  with  this  $2,000,  and  held  until  next 
dividend  is  declared,  and  should  the  party  now  buying  it  par- 
ticipate in  the  profits? 


298  CORPORATION   ACCOUNTING 

Answer. 

846.  Loss  and  Gain,  or  Profit  and  Loss,  should  not  have 
been  debited  for  the  par  value  of  the  forfeited  stock.  This  for- 
feiture had  nothing  to  do  with  the  profits  earned.  Inasmuch 
as  the  two  parties  mentioned  received,  in  fact,  nothing  in  ex- 
change for  the  notes  which  they  gave  the  company,  the  loss 
of  these  notes  was  no  direct  loss  to  the  company,*  but  simply 
meant  a  reduction  of  its  outstanding  capital.  The  company 
retained  an  equitable  right  to  the  stock,  inasmuch  as  it  was 
given  to  the  company  as  collateral  security ;  and  the  interest 
which  it  represented  in  the  assets  of  the  corporation,  viz :  2-25 
could  not  be  transfered  to  third  parties.  All  the  two  parties 
received  was  dividend  rights*^  and  voting  rights.  It  must  be 
presumed  that  at  the  time  the  notes  were  given  Bills  Receiv- 
able was  debited  and  Capital  Stock  credited;  and  when  the 
notes  were  found  uncollectible  and  the  stock  was  forfeited. 
Bills  Receivable  should  have  been  credited  and  Capital  Stock 
debited  for  $2,000.  This  entry  would  cancel  the  notes,  reduce 
the  outstanding  stock  to  $23,000,  and  leave  the  company  as 
though  it  had  never  issued  this  stock.  If  the  stock  had  not 
been  put  up  as  collateral,  and  was  sold  to  innocent  parties, 
the  company  would  lose  $2000,  because  it  would  be  compelled 
to  recognize  the  transferees  as  stockholders. 

847.  When  this  stock  was  sold  a  second  time.  Capital 
Stock  should  have  been  credited  with  the  nominal  value,  and 
the  paid-up  capital  restored  to  its  original  amount. 

848.  Ordinarily,  the  purchaser  would  participate  in  the 
profits,  as  these  shares  could  not  summarily  be  deprived  of  a 
dividend  declared  while  they  were  outstanding.  If  they  were 
purchased  near  to  a  dividend  period,  a  premium  might  be 
charged  to  offset  the  dividend. 

*Presuming  the  company  collected  interest  on  the  notes. 
*2The  interest  might  equal  or  exceed    the   dividend.     In   any    case   it 
should  be  a  fair  return  on  capital. 


CHAPTER   XXIX. 

Conversion  of  Partnerships — Issuing  Stock  to  Partners  for 
Their  Partnership  Interests — Formal  Tender  of  Rights  and 
Interest  to  the  New  Corporation — Acceptance  by  the  Corpor- 
ation— Bill  of  Sale — Closing  the  Partnership  Books — Opening 
the  New  Corporation  Books — Complete  Formula  for  Transfer. 


849.  Technically  speaking,  a  partnership  cannot  be 
changed  into  a  corporation.  A  partnership  is  not  subject  to 
transmutation.  Change  means  death,  and  a  corporation  is  a 
new  creature  whose  sole  progenitor  is  the  law.  A  partnership 
is  ''without  pride  of  ancestry  or  hope  of  posterity."  What  we 
mean  then,  by  changing  or  converting  a  partnership  into  a  cor- 
poration, is  transferring  the  assets,  liabilities,  business  inter- 
ests of  every  kind,  and  goodwill,  to  a  new  corporation  organ- 
ized for  the  purpose  of  taking  them  over;  which  corporation 
issues  to  the  members  of  the  late  partnership  share  certificates, 
giving  to  them  an  interest  in  the  corporation  equal  in  value  to 
the  interests  they  held  in  the  late  partnership. 

850.  Usually  the  conversion  of  a  partnership  is  a  simple 
matter.  If  the  old  partners  are  to  be  all  of  the  stockholders, 
it  will  not  be  necessary  to  inventory  goodwill,  trademarks,  etc., 
but  only  the  tangible  assets,  inasmuch  as  they  are  entitled  to 
all  of  the  profits,  no  matter  what  the  basis  of  capitalization. 
If  stock  is  to  be  sold  to  outside  parties,  goodwill  and  other 
intangible  assets  should  be  capitalized.  If  a  silent  partner  in 
the  firm  goes  into  the  new  corporation  he  may  be  provided  for 
by  an  issue  of  preferred  stock  or  non-voting  stock,  or  bonds. 
If  the  partners'  interests  vary,  a  special  classification  of  stock 
designated  A.,  B.  and  C.  may  be  issued  to  each  partner,  with 
certain  voting  privileges  attached.  This  may  be  varied  to  any 
extent  under  the  laws  of  some  States — only  such  portion  of 
the  assets  of  the  partnership  as  may  be  desired  need  be  trans- 
ferred to  the  corporation. 

851.  A.  B.  Smith,  C.  D.  Jones  and  G.  E.  Brown  are  en- 
gaged in  the  grocery  business  under  the  firm  name  of  Smith, 
Jones  &  Co.,  and  they  desire  to  incorporate  under  the  name  of 
"The  Staple  and  Fancy  Grocery  Co."     The  capital  stock  is 


300  CORPORATION   ACCOUNTING 

placed  at  $25,000 — 250  shares  of  $100  each.  They  are  to  receive 
paid-up  stock  in  the  new  corporation,  at  par  value,  for  their  in- 
terest in  the  business;  and  G.  H.  White  and  I.  J.  Black,  em- 
ployes, are  to  be  sold  5  shares  of  stock  each  for  cash,  to  give 
them  an  interest  in  the  new  corporation.  Capital  stock  is  to 
be  credited  for  the  paid-up  capital  only.  What  are  the  entries 
necessary  to  close  the  books  of  the  old  concern  and  open  the 
books  of  the  new? 

852.  First  take  a  Trial  Balance  off  the  books,  next  take 
an  inventory,  then  close  all  the  accounts  of  loss  and  gain  and 
all  losses  and  gains  on  fixed  and  active  assets  into  the  Profit 
and  Loss  account;  after  which  close  the  private  accounts  of 
the  partners  into  their  respective  stock  accounts  (if  a  stock 
account  has  been  kept  with  each),  lastly  balance  their  private 
stock  accounts,  and  you  will  have  the  net  investment  or  net 
worth  of  each  partner;  then  prepare  a  balance  sheet  or  state- 
ment in  the  following  form  : 

853.  Assets.. 

Merchandise  on  hand  per  inventory  $15,000 

Store  and  Office  Fixtures       ,  1,500 

Horses  and  Wagons  500 

Accounts  Receivable  5,ooo 

Bills  Receivable  1,000 

Cash  on  hand  and  in  bank  1,000 


$24,000 


Liabilities. 

A.  B.  Smith,  Stock  Account  10,000 

C.  D.  Jones,  Stock  Account  6,000 

E.  F.  Brown,  Stock  Account  5,000 

Accounts  Payable  1,250 

Bills  Payable  i,75o 


$24,000 

Having  reached  this  stage  of  the  proceedings,  the  partner- 
ship should  make  a  regular  offer  to  the  new  corporation  some- 
thing after  the  following: 


AND    CORPORATION   LAW  301 

854.  October  i,  1905. 
To  the  president  and  stockholders  of 

The  Staple  and  Fancy  Grocery  Co. 
Gentlemen : — 

We  the  undersigned,  being  all  of  the  members  of  the 
firm  of  Smith,  Jones  &  Co.,  do  hereby  submit  the  following 
offer  for  your  approval  and  acceptance : 

In  consideration  of  the  issuance  to  us  of  $21,000  of  the  paid- 
up  capital  stock  of  the  Staple  and  Fancy  Grocery  Co.,  and  the 
assumption  by  it  of  our  outstanding  trade  liabihties  amounting 
to  $3000,  we  offer  to  convey  to  said  company  by  sufficient  bill 
of  sale  and  warranty,  all  our  right,  title  and  interest  in  and  to 
all  of  the  stock  of  goods,  wares,  merchandise,  notes,  accounts 
and  books  of  account,  trademarks,  brands,  formulas,  horses 
and  wagons,  leasehold  and  goodwill,  and  all  and  singular  every 
chattel  and  thing  of  value,  tangible  and  intangible,  of  which 
the  aforesaid  firm  is  now  possessed  or  has  lawful  claim  to. 

In  witness  whereof,  we  have  hereunto  set  our  hands  and 
seals  the  day  and  year  first  above  written. 

Signed Seal 

Seal 

855.  A  meeting  of  the  stockholders  of  the  new  company 
is  now  held,  the  foregoing  tender  is  read  by  the  secretary,  and 
a  resolution  somewhat  similar  to  the  following  introduced  and 
adopted : 

856.  Whereas,  this  company  has  been  organized  for  the 
purpose  of  engaging  in  the  staple  and  fancy  grocery  business 
and 

Whereas,  the  firm  of  Smith,  Jones  &  Co.  doing  business  at 

Street,  has  offered  to  convey  to  this  company 

all  its  right,  title  and  interest  in  and  to  (here  enumerated  its 
chattels)  in  consideration  of  $21,000  of  the  capital  stock  of  this 
company  and  the  assumption  by  this  company  of  its  indebted- 
ness amounting  to  $3000,  and 

Whereas,  it  appears  to  be  to  the  best  interests  of  this  com- 
pany to  accept  said  offer,  now  therefore  be  it 

Resolved,  that  we  the  stockholders  of  the  Staple  and  Fancy 
Grocery  Co.,  in  first  meeting  assembled,  accept  the  offer  of 
Smith,  Jones  &  Co.,  and  that  upon  their  executing  a  sufficient 
bill  of  sale  of  the  aforementioned  chattels  to  this  corporation, 
the  president  and  secretary  be,  and  they  are  hereby  authorized 
on  behalf  of  this  corporation  to  issue  to  the  members  of  the 


302  COKPORATIOX   ACCOUNTING 

firm  of  Smith,  Jones  and  Co.  $21,000  of  the  paid-up  capital 
stock  of  this  corporation,  in  such  individual  amounts  as  they 
shall  agree  upon  and  stipulate  in  said  bill  of  sale. 

Bill  of  Sale. 

857.  Know  all  men  by  these  presents  that  in  consideration 
of  $21,000  of  the  paid-up  capital  stock  of  the  Staple  and  Fancy 
Grocery  Co.  a  corporation,  the  receipt  whereof  is  hereby  ac- 
knowledged, atid  other  good  and  valuable  considerations 
to-wit ;  the  assuming  of  this  firm's  indebtedness  amounting  to 
$3000  by  the 'aforesaid  corporation,  we  the  members  of  the 
firm  of  Smith,  Jones  &  Co.  by  these  presents  do  bargain,  sell 
and  convey  to  the  said  Staple  and  Fancy  Grocery  Co.,  its  suc- 
cessors and  assigns,  to  have  and  to  hold  unto  the  same  forever, 
all  our  right,  title  and  interest  in  and  to  (here  enumerate). 

And  we  jointly  and  severally  covenant  with  the  grantee, 
that  we  are  the  lawful  owners  of  the  said  goods  and  chattels, 
that  they  are  free  from  incumbrance  with  the  exception  of  the 
$3000  indebtedness  aforementioned,  that  we  have  a  right  to 
sell  the  same,  and  that  we  will  warrant  and  defend  the  same 
against  the  claims  of  any  person  or  persons  whomsoever. 

We  jointly  and  severally,  by  these  presents,  bind  our- 
selves, our  heirs,  executors,  administrators  and  assigns  forever. 

We  also  covenant  and  agree,  one  with  the  other,  and  with 
the  Staple  and  Fancy  Grocery  Co.,  a  corporation,  that  the  in- 
dividual amounts  of  stock  to  which  we  are  entitled,  and  which 
we  hereby  severally  acknowledge  having  received  is  as  fol- 
lows : 

A.  B.  Smith  $10,000 

C.  D.  Jones  6,000 

E.  F.  Brown  5,ooo 

In  witness  whereof  we  have  hereunto  set  our  hands  and 
seals  this  first  day  of  October  in  the  year  of  our  Lord  1905. 

A.  B.  Smith  (Seal) 

C.  D.  Jones  (Seal) 

E.  F.  Brown  (Seal) 

Signed,  sealed  and  delivered  in  the  presence  of 


Witnesses. 

885.  This  bill  of  sale  is  read  and  ratified  by  the  stockhold- 
ers, and  must  be  sworn  to  before  a  notary  if  it  is  to  be  recorded. 

859.  We  are  now  ready  to  close  the  books  of  the  old  firm 
and  open  the  corporation  books. 


AND   CORPORATION   LAW  303 

Closing  Entries. 

860.     First  Entry. 

The  Staple  &  Fancy  Grocery  Co.  Dr.  $24000 

To  Merchandise  $15,000 

Store  and  Office  Fixtures  1,500 

Horses  and  Wagons  500 

Accounts  Receivable,  per  Ledger  5,ooo 

Bills  Receivable,  per  Bill  Book  1,000 

Cash,  per  Cash  Book  1,000 

This  entry  closes  all  the  accounts  of  resource  on  the  old 
books  and  opens  an  account  with  the  new  corporation  in  the 
old  ledger. 

681.     Second  Entry. 

Sundries  Dr.  to  "The  Staple  and 

Fancy  Grocery  Co."  $24,000 

A.  B.  Smtih,  Stock  Account  $10,000 

C.  D.  Jones,  Stock  Account  6,000 

E.  F.  Brown,  Stock  Account  5,ooo 

Accounts  Payable,  per  ledger  1,250 

Bills  Payable,  per  bill  book  i,75o 

862.  These  two  entries  close  all  the  accounts  of  resource 
and  liability  on  the  old  books  and  also  the  account  opened 
with  the  new  company,  and  they  show  that  the  new  company 
has  taken  over  all  the  assets  and  all  the  liabilities  of  the  old 
concern. 

863.  Note  :  The  personal  accounts  aggregating  the  amount 
of  "Accounts  Receivable"  and  "Accounts'  Payable"  are  closed 
on  the  old  ledger  by  a  red  ink  entry,  and  reopened  on  the  new 
ledger,  giving  the  page  of  the  old  ledger  from  which  they  are 
taken  for  reference  purposes. 

Opening  the  Corporation  Books. 

864.  A  new  company  should  always  mean  a  new  set  of 
books.    Following  are  the  Journal  entries  to  open  the  books. 

October  1,1905. 

865.  The  Staple  and  Fancy  Grocery  Co.  capitalized  for 
$25,000,  on  a  basis  of  250  shares  of  the  par  value  of  $10  per 
share,  has  this  day  been  organized  under  the  laws  of  Califor- 
nia, and  commenced  business  by  purchasing  the  stock,  fix- 
tures, goodwill,  etc.,  of  the  grocery  firm  of  Smith,  Jones  &  Co. 


304  CORPORATION  ACCOUNTING 

(See  minute  book)  for  $21,000  net,  payable  in  an  equal  amount 
of  stock  at  par  value  as  follows  : 

866.  First  Entry. 

Subscription  Account  Dr.  $21,000 

A.  B.  Smith,  100  shares  $10,000 
C.  D.  Jones,  60  shares  6,000 

E.  F.  Jones,  50  shares  5,000 

To  Capital  Stock  $21,000 

For  the  several  amounts  of  stock  subscribed  for  and  issued 
to  the  members  of  the  firm  of  Smith,  Jones  &  Co.  in  payment 
of  their  joint  and  several  interests. 

867.  Second  Entry. 


Sundries  Dr. 

Merchandise 

$15,000 

Store  and  Office  Fixtures 

1,500 

Horses  and  Wagons 

500 

Accounts  Receivable  (personal 

accounts) 

5,000 

Bills  Receivable,  per  bill  book 

1,000 

Cash 

1,000 

To  Subscription  Account 

$21,000 

Smith,  Jones   &   Brown  pay   their  sub- 

scription by  assigning  their 

interests 

in  the  old  firm  for  stock  in 

the  new 

corporation. 

Accounts  Payable  (personal 

Accounts 

1,250 

Bills  Payable,  per  Bill  Book 

1750 

868.  When  these  entries  are  posted,  and  the  assets  and 
liabilities  of  the  old  firm  are  transferred  to  the  books  of  the 
new  company.  Capital  Stock  is  credited  for  the  amount  of 
stock  issued  to  the  old  partners.  Subscription  Account  is  in 
balance,  and  so  are  the  books.  When  White  and  Black  pay 
their  subscriptions  the  following  entry  is  made  in  the  Cash 
Book : 

869.  Cash  Book. 


Capital  Stock  $1000.00 

G.  H.  White,  5  shs.  $500 
I.  J.  Black,    5  shs.     500 


870.  Or  instead  of  the  Cash  Book  entry.  Subscription  Ac- 
count may  be  debited  through  the  Journal  and  Capital  Stock 
credited,  and  when  the  stock  is  paid  for.  Subscription  Account 
will  be  credited  and  balanced. 


CHAPTER  XXX. 

Organizing  a  Corporation  to  Take  Over  a  Partnership 
Business — Partners  Receive  Stock  at  Par  for  Their  Interests — ■* 
Other  Subscribers  Pay  50%  Cash,  and  Give  Their  Notes  for 
Balance — Only  Paid-up  Capital  Appears  on  Ledger — Reserve 
for  Doubtful  Accounts  of  Partnership — Understanding  in  Case 
the  Reserve  is  Insufficient  or  Excessive — Can  Notes  be  Taken 
for  Stock? 


871.  A.  B.  Steele  and  C.  D.  Irons  are  partners  in  the  hard- 
ware business,  and  they  desire  to  form  a  corporation,  interest 
new  capital  and  enlarge  their  business.  The  ney  company  is 
to  be  capitalized  for  $100,000  divided  into  1,000  shares  of  $100 
each.  Steele  and  Irons  are  to  take  stock  in  even  shares  in  the 
new  company,  for  their  net  investment  in  the  old  firm;  and 
E.  F.  Nutt,  G.  H.  Hammers  and  I.  H.  Mower  are  each  to  sub- 
scribe for  $10,000  worth  of  stock,  for  which  they  are  to  pay 
50%  cash  down,  and  give  their  notes'  for  the  balance;  and  the 
remainder  of  the  stock  is  to  be  held  for  the  present.  The  new 
investors  appraise  all  the  assets  of  the  old  firm,  and  cause  all 
depreciation  and  worthless  accounts  to  be  carried  into  Profit 
and  Loss  Account  before  the  books  are  closed,  with  the  under- 
standing that  if  any  of  these  accounts  are  subsequently  col- 
lected, Steele  and  Irons  are  to  have  the  option  of  taking  stock 
for  the  amount;  and  if  any  further  accounts  are  lost,  they  are 
to  have  the  option  of  paying  the  amount  of  such  losses  to  the 
corporation  or  surrendering  stock  to  that  amount.  A  state- 
ment is  then  taken  off  the  books : 

872.  The  following  statement  shows  the  net  value  of  the  sev- 
eral partners  interests  in  the  firm,  after  making  allowance  for 
depreciation,  and  bad  and  doubtful  accounts.  The  closing  en- 
tries are  the  same  as  in  the  last  example,  after  depreciation  and 
allowance  for  bad  debts  have  been  carried  to  Profit  and  Loss. 


306  CORPORATION  ACCOUNTING 

Resources. 

873.     Merchandise  $50750 

Fixtures  and  Office  Furniture  2,225 

Horses  and  Wagons  1,000 
Accounts    Receivable          $11,000 
Less  reserve  for  doubtful 

Accounts                                    500  10,500 


Bills  Receivable 

2,450 

Real  Estate  (store  buildings 

and  lots) 

3,000 

Cash 

3,500 

Liabilities. 

A.  B.  Steele,  Stock  Account 

$25,315 

C.  D.  Irons,  Stock  Account 

22,450 

Accounts  Payable 

18,310 

Bills  Payable 

7,350 

$73425 


$73,425 

874.  Note — It  is  a  general  principle  of  corporation  law 
that  all  stockholders  shall  be  treated  alike  in  the  sale  of  stock ; 
that  is,  that  no  stock  shall  be  sold  for  less  than  par,  and  then 
only  for  cash  or  its  equivalent;  but  where  all  of  the  stock- 
holders consent  to  the  taking  of  notes,  there  can  be  no  subse- 
quent complaint  on  the  par^t  of  the  stockholders ;  and  where 
the  notes'  are  sufficiently  secured,  it  is  presumed  that  the  law 
would  regard  them  as  a  cash  equivalent.  If  the  stock  is  at- 
tached to  the  notes  as  collateral  it  would,  ordinarily,  be  suffi- 
cient security. 

Opening  the  Corporation  Books. 

875.  Before  making  the  first  entry,  it  must  be  understood 
that  Mr.  Steele  subscribes  for  and  takes  253  shares  of  stock, 
which  leaves  him  a  credit  balance  of  $15;  and  Mr.  Irons  sub- 
scribes for  and  takes  224  shares,  which  leaves  him  a  credit  of 
$50.  This  arrangement  may  be  included  in  the  resolution  and 
Bill  of  Sale. 


AND   CORPORATION   LAW 


307 


876.     First  Entry. 

Subscription  Account  Dr. 

A.  B.  Steels,  253  shs.  $25,300 
C.  D.  Irons,  224  shs.  22,400 
E.  F.  Nutt,  100  shs.  10,000 

G.  H.  Hammers,  100  shs.  10,000 
I.  J.  Mower,  100  shs.       10,000 
To  Capital  Stock 

Total  Stock  Subscription  to  date. 

Substitute  Entry. 


$77,700 


$77,700 


877.  Where  it  is  required  of  the  bookkeeper  to  show  the 
full  capital  on  the  ledger,  and  also  the  unsold  stock,  make  the 
following  entry: 


Sundries  Dr.  to  Capital  Stock 

Subscription  Account  $77,700 

A.  B.  Steele,  253  shs.  $25,300 
C.  D.  Irons,  224  shs.  22,400 
E.  F.  Nutt,  100  shs.  10,000 

G.  H.  Hammers,  100  shs.  10,000 
I.  J.  Mower,  100  shs.         10,000 

Treasury  Stock  $22,300 

223  shares  unsold. 

878.     Second  Entry. 


$100,000 


Sundries  Dr. 
Merchandise 
Fixtures  and  Furniture 
Horses  and  Wagons 
Accounts  Receivable 
Bills  Receivable 
Real  Estate 
Cash 

To   Subscription   Account — paid 
by  S.  &  I.  as  per  terms  of  sale 

A.   B.   Steels,   bal.   after   paying 
his  subscription 

C.  D.  Irons,  bal.  after  paying  his 
subscription 

Accounts  Payable 

Bills  Payable 

Reserve  for  doubtful  accounts 


$50,750 

2,225 

1,000 

11,000 

2,450 
3,000 
3.500 


$47,700 

15 

50 
18,310 

7,350 
500 


308  CORPORATION   ACCOUNTING 

The  foregoing  items  represent  the  assets  and  liabilities  of 
the  firm  of  Steels  &  Irons  transferred  to  this  corporation  as 
per  terms  of  Bill  of  Sale  and  resolutions — see  minutes  of  first 
meeting. 

879.  Note — Reserve  for  doubtful  accounts  is  an  offset  to 
"Accounts  Receivable"  reducing  them  to  $10,500,  the  amount 
for  which  they  were  taken  over. 

Another  Substitute  Entry. 

880.  Instead  of  the  last  half  of  the  second  entry,  the  fol- 
lowing entry  may  be  substituted  : 

To  A.  B.  Steele,  credit  from  old 

firm's  books  $25,315 
To  C.  D.  Irons,  credit  from  old 

firm's  books  22,450 

Accounts  Payable  18,310 

Bills  Payable  7,350 

Reserve  for  doubtful  accounts  500 

Then  another  entry  like  this  in  the  Journal  : 

Sundries  Dr.  to  Subscription  $47,700 

A.  B.  Steele  $25,300 

C.  D.  Irons  22,400 

For  amount  of  their  subscription  to  the  Capital  Stock  of 
the Company. 

880.  In  either  case  the  old  partners  would  have  a  credit 
balance  on  the  new  books,  which  would  be  closed  out  by  pay- 
ing them  the  amount  in  cash. 

881.  Subscription  account  now  stands  debited  for  $77,700, 
the  full  amount  subscribed,  and  credited  for  $47,700,  the 
amount  paid  by  Steele  and  Irons,  leaving  a  balance  of  $30,000 
which  is  to  be  paid  by  the  remaining  stockholders  of  the  Com- 
pany. As  soon  as  they  pay  their  50%  in  cash,  Subscription 
Account  is  credited  through  the  Cash  Book,  and  the  following 
Journal  entry  is  made  for  the  balance : 

882.  Bills  Receivable  Dr.  $15,000 

To  Subscription  Account  $15,000 

Nutt,  Hammers  and  Mower  give  their  notes  for  $5000  each 
in  payment  of  balances  due  on  their  subscriptions — see 
Notes ,  Bill  Book,  page 

883.  This  last  entry  balances  the  Subscription  Account 
and  shows  the  company  with  a  paid-up  Capital  of  $77,700. 


AND   CORPORATION   LAW  309^ 

Collecting  Bad  Debts  and  Issuing  More  Stock. 

884.  Suppose  that  the  corporation  collects  $200  of  the  old 
firm's  accounts  which  were  called  doubtful,  and  that  Steele 
and  Irons  arrange  between  themselves  to  take  one  share  each 
therefor;  what  entry??  Here  the  reserve  for  Doubtful  Ac- 
counts has  been  reduced  $200  by  the  actual  payment  of  some 
of  the  doubtful  accounts ;  so  after  crediting  the  accounts  paid, 
through  the  Cash  Book,  we  make  the  following 

885.  Journal  Entry. 

Reserve  for  Doubtful  Accounts         $200 

To  Capital  Stock  $200 

Steele  and  Irons  receive  one  share  of  stock  each,  on  account 
of  doubtful  debts  collected,  and  for  which  reserve  was  made. 

886.  If  no  more  doubtful  accounts  are  collected,  the  re- 
maining ones  are  balanced  into  "Reserve"  and  the  account 
closed. 

887.  This  entry  could  be  varied  if  Capital  Stock  was'  al- 
ready credited  with  the  full  capital,  and  a  so-called  Treasury 
Stock  Account  debited  for  the  unsold  portion. 

Losing  More  Accounts  and  Forfeiting  Stock. 

888.  Suppose  that  the  new  company  loses  $200  more  of 
the  old  firm's  accounts,  arid  that  according  to  agreement  the 
old  partners  decide  to  forfeit  one  share  of  stock  each  to  the 
company,  what  entry? 

889.  Capital  Stock  Dr.  $200 

To  Profit  and  Loss  $200 

Steele  and  Irons  forfeit  one  share  of  stock  each  to  make 
up  for  bad  accounts  turned  over  to  the  Company  as  an  Asset. 

890.  The  reason  for  crediting  Profit  and  Loss  is  that  this 
account  has,  or  will  be  debited  for  the  accounts  lost. 

891.  The  reason  for  debiting  Capital  Stock  Account  is 
that  the  paid-up  Capital  has  been  reduced,  and  this  $200  stock 
is  as  though  it  were  never  issued. 

892.  If  Steele  and  Irons  decided  to  exercise  the  alternative 
option,  they  could  pay  the  accounts  that  were  lost,  and  let 
their  subscriptions  stand.  This  would  be  the  simplest  and  best 
way,  and  would  obviate  the  necessity  of  them  transferring  two 
shares  back  to  the  company. 


;310  CORPORATION  ACCOUNTING 

Doubtful  Accounts. 

893.  In  transferring  the  Accounts  Receivable  from  the  old  j 
ledger  to  the  new,  the  doubtful  accounts  should  also  be  trans-  *i 
ferred,  so  that  they  may  not  be  lost  track  of,  and  that  diligent 
effort  may  be  made  to  collect  them,  and  the  interests  of  the 
■old  firm's  members  be  protected.  Accounts  that  are  consid- 
ered worthless  should  not  be  transfered.  The  doubtful  ac- 
counts could  be  itemized  in  a  suspense  account. 


CHAPTER   XXXI. 


Partners  Organize  a  $100,000  Corporation — Sell  Their 
Firm's  Interest  to  the  Corporation  for  $75,000  in  Stock — Cor- 
poration Sells  Remaining  $25,000  Stock  for  Cash — Two  Ways 
of  Opening  the  Books. 


894.  A  partnership  with  a  net  capital  of  $75,000  is  con- 
verted into  a  corporation  with  a  capital  of  $100,000.  Paid-up 
stock  is  issued  to  the  partners  for  $75,000,  and  the  remaining 
$25,000  worth  of  stock  if  sold  for  cash  to  increase  the  working 
capital ;  what  entry? 

895.  After  the  old  books  have  been  closed,  and  the  assets 
and  liabilities  of  the  old  firm  have  been  transferred  to  the 
books  of  the  new  corporation,  some  accountants  would  make 
the  following  Journal  entry: 

896.  Subscription  Account  $100,000 

(Here  give  names.) 

To  Capital  Stock  $75,000 

To  Working  Capital*  25,000 

897.  This  is  given  simply  to  illustrate  a  rather  peculiar 
method  of  dividing  the  capital.  The  inference  is  that  the  com- 
pany has'  an  operating  cash  capital  of  $25,000  over  and  above 
its  plant,  material,  etc.,  but  as  the  company  operates  on  its 
plant,  material,  etc.,  just  as  much  as  on  its  cash  capital,  and 
as  its  cash  capital  will  in  all  likelihood  be,  at  least  partially, 

*Vide  chaBter  XXV. 


AND   CORPORATION   LAW  311 

converted  into  material,  etc. ;  there  is  no  good  reason  for  open- 
ing a  separate  account  for  it.  As  long  as  the  capital  is  fully 
paid  up,  as  in  this  case,  it  should  be  represented  by  one  ac- 
count, and  no  good,  but  only  confusion,  can  come  out  of  di- 
viding it.  Furthermore,  the  Capital  Stock  Account  does  not 
represent  either  the  nominal  or  actual  capital  of  the  company, 
and  this  fact  alone  should  condemn  the  method.  The  Capital 
Stock  Account  must  under  no  circumstances  be  less  than  the 
paid-up  capital.    The  correct  entry  would  be  : 

898.  Subscription  Acocunt       Dr.  $100,000 

To  Capital  Stock  $100,000 

giving  names  of  all  subscribers  to  the  Capital  Stock,  and  the 
separate  amounts  of  their  subscriptions,  or,  to  make  the  entries 
for  the  partners  subscriptions  through  the  Journal,  and  the 
Cash  Subscriptions  through  the  Cash  Book,  as  illustrated  in 
Chapter  XXX;  or  if  partners  receive  credit  on  open  account 
for  their  respective  equities  in  the  net  assets  turned  over,  then 
let  the  entry  be: 

899.  Sundries    Dr. 

To  Capital  Stock. 


CHAPTER   XXXII. 


A  Legerdemain  Performance — Converting  a  Partnership 
That  Was  Barely  Solvent  Into  a  Corporation  With  a  Paid-up 
Capital  of  $10,000 — Not  An  Additional  Dollar  Invested  in  the 
Enterprise — Transferring  the  Business — Opening  the  Corpor- 
ation's Books — Entries  in  Detail — An  Actual  Occurrence. 


900.  The  facts  leading  up  to  this  rather  novel  and  singular 
proposition  were  substantially  as  follows : 

Two  men  engaged  in  partnership  in  a  certain  mercantile 
business — one  an  urban  youth  with  experience  and  presumed 
ability,  the  other  a  rustic  gentleman  inexperienced  but 
wealthy.  The  young  man's  capital  consisted  of  his"  experience, 
so  the  older  gentleman  took  him  into  partnership,  and  on  the 


312  CORPORx^TION   ACCOUNTING 

strength  of  his  credit  at  the  bank,  borrowed  $10,000  for  the 
partnership,  with  which  to  commence  business.  The  young 
man  managed  the  business,  obtained  quite  a  credit,  and  got 
pretty  well  into  debt.  The  older  gentleman  learned  this,  and 
knowing  that  the  firm's  liabilities  would  have  to  be  met  by 
him,  he  proceeded  to  investigate  with  a  view  to  protecting 
himself.  He  discovered  that  the  liabilities  of  the  firm  were 
about  $18,000,  and  the  assets  were  appraised  for  just  an  equal 
amount.  The  liabilities,  of  course,  included  the  note  hereto- 
fore mentioned.  This  left  the  firm  in  the  same  financial  con- 
dition in  which  it  commenced  business — possessing  and  owing 
equal  amounts, — assuming  the  appraisement  to  be  correct. 
The  old  gentleman  was  naturally  a  little  bit  scared  at  the  pros- 
pect. His  partner  had  placed  large  orders  for  goods,  and  he  de- 
sired to  dissolve  the  partnership,  incorporate  the  business,  limit 
the  young  man's  powers,  and  reduce  his  personal  liability.  He 
proposed  to  countermand  the  orders  placed  by  the  firm,  form 
a  corporation  with  a  paid-up  capital  of  $10,300 — he  and  his 
partner  to  buy  and  pay  for  $10,000  worth  of  stock  in  cash — 
$5000  each,  and  three  others  to  take  $100  worth  of  stock  each. 
He  then  proposed  to  take  over  all  of  the  assets  and  assume  all 
of  the  liabilities  of  the  partnership,  to  pay  off  the  firm's  note 
for  $10,000,  and  yet  not  put  another  dollar  into  the  business, 
nor  get  another  dollar  from  the  bank.  How  did  he  do  it  and 
what  were  the  entries  ? 

901.  First  the  corporation  was  formed — the  partners  and 
three  others  being  named  as  directors  in  the  Articles  of  Incor- 
poration— the  partners  subscribing  for  $5000  each  and  the 
others  for  $100  each  of  the  capital  stock.  Next  the  partnership 
offered  to  the  corporation  all  of  its  assets  in  consideration  of 
the  nominal  sum  of  $1.00  and  the  assumption  of  its  liabilities; 
this  offer  the  corporation  accepted,  acquiring  the  partnership 
business.  The  writer  happened  to  represent  the  bank  and  the 
old  gentleman  through  the  next  stage  of  the  business.  The 
old  gentleman  drew  his  personal  check  for  $10,000  which  he 
turned  over  to  the  corporation  in  payment  of  100  shares  of 
stock  which  he  had  immediately  issued  (50  shares  each)  to 
liimself  and  partner.  He  then  took  his  partner's  note  for 
$5000,  with  the  stock  attached  to  it  as  collateral  security.  Next 
he  drew  the  corporation's  check  for  $10,000  in  favor  of  the 
bank,  and  also  signed  a  note  for  $10,000.  His  check,  the  cor- 
poration's check  and  the  note  were  all  handed  to  the  writer 
after  being  properly  endorsed.  I  made  out  a  deposit  tag  to 
his  credit  for  $10,000,  attaching  his  note  thereto,  another  one 
to  the  corporation's  credit  for  $10,000,  attaching  his  personal 


AND   CORPORATION   LAW  313 

check  thereto.  I  then  offered  his  note  to  the  manager  of  the 
bank,  which  he  immediately  accepted,  giving  him  credit  there- 
for, then  deposited  his  check  to  the  credit  of  the  corporation, 
and  handed  the  manager  the  corporation's  check  for  $10,000 
to  cancel  the  old  firm's  note  which  it  had  assumed.  In  this 
way  the  partners  paid  for  $10,000  stock  without  investing  an 
additional  dollar,  the  old  partnership  note  was  liquidated,  and 
the  bank  and  our  rustic  friend  stood  in  exactly  the  same  rela- 
tion to  each  other  as  before  incorporating. 

Opening  the  Corporation  Books. 
Journal. 

902.  First  Entry. 

Sundries    Dr. 

Subscriber  No.  i  $5000 

Subscriber  No.  2  5000 

Subscriber  No.  3  100 

Subscriber  No.  4  100 

Subscriber  No.  5  100 

To  Capital  Stock  $10,300 
The  above  represents  the  total  subscription  to  the  Capital 
Stock  of  this  company. 

903.  Second  Entry. 

Sundries   Dr. 

Merchandise  $10,000 

Fixtures,  Furniture,  etc.  1,000 

Bills  Receivable  1,500 

Accounts  Receivable  5,ooo 

Goodwill  I 

Cash — see  cash  book  500 

To  Bills  Payable  $10,000 

To  Accounts  Payable  8,000 

To  Partners'  Stock  Acct.  i 

The  above  schedule  of  assets  and  liabilities  were  taken  over 
from  the  firm  of  ''blank,"  per  Bill  of  Sale  and  resolution — See 
minutes  of  first  meeting. 

904.  Have  substituted  numbers  for  the  names  of  the  cor- 
porators, and  "Partners'  Stock  Account"  for  the  old  firm  name. 
The  subscribers  were  all  charged  in  one  account,  a  line  to  each 
name  and  amount. 


314  COEPOKATION  ACCOUNTING 

905.     Dr.  Cash  Book. 


Cr. 


Cash  on  hand  received 
from  old  firm  $  500 

Subscriber  No.  i  5000 

Subscriber  No.  2  5000 

Subscriber  No.  3  100 

Subscriber  No.  4  100 

Subscriber  No.  5  100 


10800 


To  balance  on  hand       799 


Partners  in  Payment 

for  Goodwill 
Bills    Payable— Paid 

old  firm  note 
Balance 


$       I 

10,000 
799 

10800 


906.  When  the  foregoing  entries  were  all  posted,  Sub- 
scribers Account,  Bills  Payable,  and  Partners  Account  were 
all  balanced;  and  a  statement  taken  off  the  books  for  the 
credit  agencies  showed  the  following  condition : 

907.  Assets. 


Merchandise 

$10,000 

Furniture,  Fixtures,  etc. 

1,000 

Bills  Receivable 

1,500 

Accounts  Receivable 

5,000 

Goodwill 

I 

Cash  on  hand 

799 

Liabilities. 

Accounts  Payable 

$  8,000 

Capital   Stock 

10,300 

$18,300 


$18,300 


908.  This  made  a  good  showing  for  the  new  corporation. 
It  showed  assets  amounting  to  $18,300  and  trade  liabilities  of 
only  $8,000.  In  other  words,  it  had  an  unimpaired  capital  of 
$10,300. 

The  old  gentleman's  position  is  this  :  He  can  not  lose  more 
than  $10,000  until  the  assets  shrink  below  the  trade  liabilities, 
and  even  if  they  do  (under  the  California  law)  he  can  lose  only 


AND    CORPORATION    LAW  315 

his  proportion  of  any  further  loss.  If  the  corporation  succeeds 
he  has  stock  to  secure  him  for  one-half  the  amount  borrowed, 
and  his  old  partner  is  paying  him  interest  on  this. 


CHAPTER  XXXIII. 


Merging  Two  Partnerships  Into  a  Corporation — Newspa- 
per and  Job  Printing  Business  Consolidated — Assets  Turned 
Over  at  Appraised  Valuation — Depreciation  and  Bad  Debts 
Written  Off,  and  Reserve  Created  for  Doubtful  Accounts — 
Bonus  of  $1000  in  Stock  Paid  to  Promoter — Statement  and 
Entries  in  Detail — Closing  Reserve  Account. 


909.  A.  D.  Webb  and  C.  D.  Pressley  are  engaged  in  pub- 
lishing a  daily  and  weekly  newspaper,  known  as  the  "Daily 
and  Weekly  Reflex"  and  E.  F.  Ashland,  G.  H.  Argyle  and  I.  J. 
Sterling  are  partners  in  the  Book  and  Job  Printing  business. 
K.  L.  Bond,  manager  for  Webb  &  Pressley,  brings  about  an 
understanding  between  the  two  firms  by  which  they  agree  to 
consolidate  their  plants  and  their  capital,  and  form  a  corpora- 
tion to  be  known  as  ''The  Reflex  Publishing  Company."  The 
Capital  Stock  is  placed  at  $150,000,  divided  into  3,000  shares 
of  $50  each.  The  members  of  the  respective  partnerships'  are 
to  receive  stock  in  the  corporation  in  proportion  to  their  hold- 
ings in  the  old  firms,  and  Mr.  Bond  is  to  receive  a  bonus  of 
20  shares  of  paid-up  stock  for  his  services  in  forming  the  new 
company.  No  more  stock  is  to  be  sold  for  the  present.  Webb 
&  Pressley  have  had  their  business  divided  into  departments, 
each  department  having  its  own  account  of  income  and  ex- 
pense, and  they  desire  that  this  system  shall  prevail  in  the  new 
company.  An  advertising  ledger  has  been  kept,  and  separate 
subscription  ledgers  for  the  divisions  of  the  circulation  into 
departments;  what  are  the  entries? 


316  CORPORATION   ACCOUNTING 

Statement  of  Webb  &  Pressley. 

910.  Assets. 

Plant  Machinery,  etc.,  appraised  at  $40,000 

Associated  Press  Franchise  5,ooo 

Materials  and  Supplies  3,000 

Horses  and  Buggies  1,000 

Furniture  and  Fixtures  i>50o 

Advertising  Ledger  (due  on  advertising)  10,500 

Subscription   Ledger-Routes    (inventoried)  3,000 

Subscription   Ledger-Mail   (inventoried)  1,000 

Subscription  Ledger-Weekly  (inventoried  1,500 

News  Agencies                                                    •  1,000 

Cash  8,000     $75,500 


Liabilities. 

A.  B.  Webb,  Stock  Account  $40,000 

C.  D.  Pressley,  Stock  Account  32,000 

Accounts  Payable  3,ooo 

Reserve  for  doubtful  accounts  500     $75,500 


911.  N.  B.  The  parties  to  the  consolidation  agree  that, 
inasmuch  as  no  outsiders  are  coming  into  the  corporation,  no 
account  shall  be  taken  of  the  goodwill  of  either  firm. 

Statement  of  E.  F.  Ashland  &  Co. 


912.                                     Assets. 

Plant,  Machinery,  etc.,  appraised  at 

$25,000 

Raw  Material  and  partly  completed  work 

4,000 

Accounts  Receivable 

3,200 

Bills  Receivable 

1,000 

Cash 

2,000 

Liabilities. 

E.  F.  Ashland,  Stock  Account 

$12,000 

G.  H.  Argyle,  Stock  Account 

10,000 

I.  J.  Sterling,  Stock  Account 

10,000 

Accounts  Payable 

2,000 

Bills  Payable 

1,000 

Reserve  for  doubtful  accounts 

200 

$35,200 


$35,200 

913.     Close  the  partnerships  books  as  in  Chapter  XXIX. 


AND   CORPORATION   LAW  317 

In  this  case  any  subsequent  gain  or  loss  on  account  of  doubt- 
ful accounts  is  to  accrue  to,  or  be  borne  by,  the  new  company. 
All  worthless  accounts,  and  depreciation  of  every  kind,  were 
written  off  before  the  foregoing  statements  were  made  up. 

Opening  the  Books  of  the  Reflex  Publishing  Company. 

914.     First  Entry. 
Sundries  Dr. 
Subscription  Account,  Subscribed 


Capital 

$104,000 

Unsubscribed  Capital 

46,000 

Plant  turned  over  by  Webb   & 

. , 

Pressley 

$40,000 

By  Ashland  &  Co. 

25,000 

65,000 

Press  Franchise — Webb  &  Presley 

5,000 

Materials,  etc. — Webb  &  Presley 

3,000 

Ashland  &  Co. 

4,000 

7,000 

Horses   and    Buggies — Webb    & 

Presley 

1,000 

Furniture   and    Fixtures — Webb 

&  Presley 

1,500 

Accounts    Receivable — Webb    & 

Presley 

10,500 

Ashland  &  Co. 

3,200 

13700 
1,000 

Bills  Receivable— Ashland  Co. 

Subscription   Accounts — Routes, 

Webb  &  Presley 

3,000 

Sub.  Daily  Mail— Webb  &  Presley 

1,000 

Sub.  Weekly               "      "      " 

1,500 

News  .igents              "      "      " 

1,000 

Cash                           "      ''       " 

8,000 

Ashland  &  Company     2,000 

10,000 

To  Capital  Stock 

$150,000 

To  Subscription  Account 

104,000 

A.  B.  Webb        800  shs. 

$40,000 

C.  D.  Presley,     640  shs. 

32,000 

E.  F.  Ashland,    240  shs. 

12,000 

G.  H.  Argyle,     200  shs. 

10,000 

I.  J.  Sterling,      200  shs. 

10,000 

Accounts  Payable  W.  &  P. 

3,000 

Accounts  Payable  A.  &  Co. 

2,000 

5,000 

Bills  Payable  A.  &  Co. 

1,000 

Reserve  for  doubtful  accounts 

700 

$260,700  $260,700 


318  CORPORATION   ACCOUNTING 

915.  The  above  entry  places  all  the  assets  and  liabilities 
of  the  two  firms  on  the  new  company's  books.  It  shows  the 
subscribed  capital  of  $104,000  paid  up.  It  also  shows  the  un- 
subscribed capital,  and  the  full  capital  of  the  company.  This, 
as  so  often  explained,  is  not  necessary,  but  is  frequently  de- 
sired by  directors.  In  making  up  statements,  this  negative 
entry  of  $46,000  does  not  appear,  but  is  simply  deducted  from 
the  authorized  capital  and  the  difference  stated  as  "Paid-up 
Capital." 

916.  The  "Accounts  Receivable"  represent  the  advertis- 
ing and  Job  Printing  Accounts.  These  may  be  kept  in  the 
same  ledger  and  governed  by  one  Controlling  Account.  It  is  not 
desirable  to  have  two  ledger  accounts  with  the  same  customer. 
The  segregation  of  the  items  to  the  credit  of  the  separate  de- 
partments can  be  made  in  the  posting  mediums.  A  Controlling 
Account  is  also  kept  for  each  subdivision  of  the  Subscription 
Department.  The  manner  of  accounting  for  the  subscription 
department  is,  from  the  very  exigencies  of  the  case,  radically 
different  from  the  others;  but  in  no  department  can  greater 
economic  methods  of  accounting  be  introduced. 

917.  Second  Entry. 

Incorporating  Expense  $1,000 

To  Unsubscribed  (Treasury)  Stock  $1,000 

K.  L.  Bond  receives  a  bonus  of  20  shares  of  paid-up  stock 
for  his  services  in  bringing  about  the  formation  of  the  new 
company. 

918.  Some  states  permit  of  stock  being  issued  against  ser- 
vices performed ;  others  do  not,  for  the  reason  that  the  services 
are  too  frequently  incommensurate  with  the  price  paid,  and 
that  service  is  an  intangible  contribution  to  the  capital  stock 
or  trust  fund  of  a  corporation. 

919.  This  "Incorporation  Expense"  must  necessarily 
stand  on  the  books  as  an  asset  until  the  close  of  the  first  fiscal 
period,  when  it  may  be  written  off  in  whole,  or  in  part,  into 
Surplus  Account. 

920.  N.  B.  A  "Lost  Accounts"  book  should  be  kept,  and 
when  an  account  is  lost,  it  should  be  examined  to  ascertain 
the  proportion  of  it  belonging  to  each  department.  These  pro- 
portions are  then  entered  under  department  headings  in  the 
''Lost  Accounts"  book,  and  at  the  end  of  each  period  each  de- 
partment is  ch.arged  for  its  share  of  the  loss. 


AND   CORPORATION   LAW  319 

Closing  Reserve  Account. 

921.  All  losses  on  account  of  bad  debts  may  be  closed  into 
''Reserve  for  Bad  and  Doubtful  Accounts/'  and  the  balance 
of  this  account  closed  into  Profit  and  Loss.  A  new  Reserve 
based  on  past  experience  can  then  be  created  for  the  ensuing 
period,  by  debiting  Profit  and  Loss  and  crediting  Reserve  Ac^ 
count;  or  losses  may  be  carried  direct  to  Profit  and  Loss  Ac- 
count from  whatever  account  or  accounts  they  repose  in  at 
the  close  of  the  period,  and  the  Reserve  Account  adjusted  with 
Profit  and  Loss  Account  for  the  next  period — the  adjustment 
being  based  on  whether  previous  reserves  have  been  too  high 
or  too  low,  extraordinary  circumstances  being  left  out  of  con- 
sideration. 


CHAPTER   XXXIV. 


Consolidating  Two  Mining  Companies — Consolidation  As- 
sumes All  the  Assets  and  Liabilities  of  Constituent  Companies 
— Issuing  Consolidated  Stock  at  Intrinsic  Value  of  Old  Com- 
panies' Stock — Arriving  at  This  Value — One  Company  Gets 
Preferred,  the  Other  Ordinary  Stock — Closing  the  Old  Books 
and  Opening  the  New — Comprehensive  Statement  of  Assets 
and  Liabilities — Principles  Extended  and  Applied  to  Any 
Number,  or  Any  Class  of  Corporations. 


922.  There  are  two  ways  in  which  a  consolidation  of  two 
corporations  may  be  formed;  one  is  by  dissolving  one  of  the 
old  companies  and  amending  the  charter  of  the  other;  the 
other  way  is  to  dissolve  both  constituent  companies  and  form 
a  new  company. 

923.  The  Mascot  Mining  Company  and  The  Columbus 
Mining  Company  own  contiguous  properties,  and  they  desire 
to  consolidate  for  the  purpose  of  operating  under  one  man- 
agement and  with  one  set  of  stamps.  The  Mascot  Mining 
Company  is  capitalized  for  $100,000 — 1,000  shares  of  $100  each 
— $80,000  of  which  is  subscribed  and  paid  for,  and  no  entry 


320  CORPOEATION  ACCOUNTING 

appears  on  the  books  for  the  balance  and  The  Cohimbus  Min- 
ing Co.  is  capitaHzed  for  $150,000 — 15,000  shares  of  $10  each — 
$100,000  paid  up  and  $50,000  in  so-called  treasury  stock.  They 
are  to  consolidate  under  the  name  of  the  Consolidated  Mascot 
Mining  Company.  The  capital  stock  is  placed  at  $250,000, 
2,500  shares  of  $100  each,  and  the  stockholders  are  to  receive 
stock  in  the  new  company  in  proportion  to  the  appraised  value 
of  their  property  in  the  old  companies ;  the  unsubscribed  stock 
is  to  appear  on  the  books  as  Treasury  Stock.  In  addition  to 
this,  the  stockholders  in  the  Mascot  Mining  Company  are  to 
receive  5  per  cent  cumulative  preferred  stock,  instead  of  ordi- 
nary stock,  on  account  of  the  advanced  state  of  development 
of  the  Mascot  and  the  better  shape  of  the  company.  The  Con- 
solidated Company  is  to  assume  all  the  liabilities  of  the  old 
companies.  What  are  the  entries  to  close  the  books  of  the  old 
companies  and  open  the  books  of  the  new  company? 

924.     Statement  of  the  Mascot  Mining  Company. 


Resources 

Book  Value 

Appraised  \ 

'alue 

Mine— "The  Mascot" 

$50,000 

$75,000 

Machinery  and  Tools- 

40,000 

30,000 

Stores  and  Supplies 

1,500 

2,000 

Buildings  and  Lumber 

1,500 

2,000 

Water  Rights 

1,000 

1,000 

Real  Estate — Timber  Land     1,000 

1,000 

Amalgam  and  Ore 

3,000 

3,000 

Cash 

6,000 

6,000 

$I04,( 

DOO- 

$120,000 

Liabilities 

Accounts  Payable 

$5,000 

$5,000 

Wages  Due 

5,000 

5,000 

Capital  Stock,  paid  up 

80,000 

80,000 

Surplus  Account 

14,000 

30,000 

$I04,( 

DOO- 

$120,000 

925.  It  will  be  seen  from  the  above  statement  that  the 
company  has'  a  net  surplus  of  $30,000  over  its  original  invest- 
ment, on  its  appraised  valuation;  in  other  words  it  has  $1.37^ 
for  every  $1  invested,  and  it  is  to  receive  $1,375^2  worth  of 
stock  in  the  consolidated  company  for  every  dollar's  worth  of 
stock  in  the  old  company. 


AND   CORPORATION  LAW                                   321 

926.     To  put  it  in  another  way : 

Paid-up  Capital  $80,000 

Surplus  over  all  Liabilities  30,000 


Actual  Capital,  payable  in  Consolidated  Stock  $1 10,000 
Entries  to  Merge  This  Company  and  Close  Its  Books. 
927.     First  Entry. 

The  Consolidated  Mascot 

Mining  Co.  Dr.  $120,000 

To  Mine  Account  $75,ooo 

"    Machinery  and  Tools  30,000 

"    Stores  and  Supplies  2,000 

"    Buildings  and  Lumber  2,000 

"    Water  Rights  1,000 

"    Real  Estate  1,000 

"    Amalgam  and  Ore  3,ooo 

"    Cash  6,000 

Assets  of  this  company  transferred  to  the  Consolidated 
Mining  Company,  per  resolution  of  Stockholders'  Minute 
Book,  page 

This  entry  opens'  an  account  with  the  Consolidated  Com- 
pany and  balances  Water  Right,  Real  Estate,  Amalgam  and 
Cash  Accounts.  Mine  Account,  Stores  and  Supplies,  and 
Buildings  have  credit  balances  of  $25,000,  $500  and  $500  re- 
spectively, and  these  are  balanced  by  the 

928.  Second  Entry. 

Sundries  Dr.  to  Profit  and  Loss  $26,000 

Mine  Account  $25,000 

Stores  and  Supplies  500 

Buildings  and  Lumber  500 

For  increase  in  valuation  per  appraisement. 

This'  balances  all  the  resource  accounts  excepting  Machin- 
ery and  Tools,  on  which  there  is  a  debit  balance  of  $10,000. 
This  is  closed  by  the 

929.  Third  Entry. 

Profit  and  Loss  Dr.  $10,000 

To  Machinery  and  Tools  $10,000 

For  depreciation  on  machinery  and  tools  per  appraisement. 


322  CORPORATION   ACCOUNTING 

930.  Fourth  Entry. 

Sundries  Dr.  to  the  Consolidated 

Mining  Co.  $120,000 

Wages  Accrued  $  5,000 

Accounts  Payable  5,ooo 

Capital  Stock  80,000 

Surplus  Account  30,000 

For  liabilities  of  the  Mascot  Mining  Company  transferred 
to  and  assumed  by  The  Consolidated  Company. 

931.  It  will  be  noted  that  in  the  second  entry,  Profit  and 
Loss  Account  is  credited  with  a  gain  of  $26,000;  and  in  the 
third  entry  it  is  debited  with  a  loss  of  $10,000,  leaving  a  credit 
in  this  account  of  $16,000.  It  will  also  be  noted  that  before 
making  the  closing  entries  Surplus  Account  had  a  credit  of 
$14,000  and  in  the  fourth  entry  it  is  debited  with  $30,000,  leav- 
ing a  debit  balance  on  this  account  ot  $16,000,  so  we  make  a 

932.  Fifth  Entry. 

Profit  and  Loss  Dr.  $16,000 

To  Surplus  Account  $16,000 

For  net  gain  in  the  surplus  of  The  Mascot  Mining  Com- 
pany, per  appraisement. 

933.  This  closes  all  the  accounts  on  the  books,  and  shows 
that  the  assets  and  liabilities'  of  the  company  have  been  trans- 
ferred to  the  Consolidated  Company.  It  only  remains  now 
for  the  stockholders  to  surrender  their  stock  and  have  all  the 
accounts  closed  on  the  Stock  Ledger. 

934.  All  the  details  of  the  transfer  should  be  spread  on  the 
minutes  of  both  companies — the  tender  of  the  Mascot  Com- 
pany to  the  Consolidated,  the  resolution  of  the  Consolidated 
Company  accepting  the  tender,  the  Bill  of  Sale  conveying  all 
the  property  and  chattels  and  so  forth.  For  outline  of  these 
forms  see  Chapter  XXIX,  paragraph  854  et  seq.  in  conversion 
of  partnerships.  The  Bill  of  Sale  should  either  be  recorded,  or 
filed  in  the  archives  of  the  Consolidated  Company. 


AND   CORPORATION   LAW  323 

935.     Statement  of  the  Columbus  Mining  Company. 


Resources 

Book  Value 

Appraised  Value 

Mine— "The  Cohimbus" 

$90,000 

$75,000 

Machinery  and  Tools 

25,000 

24,000 

Stores  and  Supplies 

2,500 

2,500 

Buildings  and  Lumber 

2,000 

1,500 

Water  Rights 

1,500 

1,000 

Amalgam  and  Ore 

1,500 

1,500 

Cash 

2,500 

2,500 

Treasury  Stock 

50,000 

Impairment  of  Capital  (Red 

ink) 

5,000 

^1*7  tf 

,000 $113,000 

H>^7b> 

Liabilities 

Book 

Appraised 

Bills  Payable 

$     5.000 

$     5,000 

Wages  Accrued 

8,000 

8,000 

Capital  Stock 

150,000 

100,000 

Surplus  Account 

12,000 

/-v/-v/-i                                          Cb  T  T  -^    r^r\r^ 

936.  It  will  be  observed  from  the  above  statement  that 
capital  stock  was  credited  for  the  full  capital  and  that  treasury 
stock?  was  debited  for  the  unsold  stock.  In  making  the  ap- 
praisement treasury  stock  was  not  figured  as  an  asset,  neither 
was  its  equivalent  in  capital  stock  figured  as  a  liability — these 
amounts  negative  each  other.  It  will  be  further  observed  that 
the  books'  showed  a  surplus  of  $12,000,  but  the  assets  shrunk 
$17,000  on  appraisement,  so  that  instead  of  the  assets  exceed- 
ing the  liabilities  by  $12,000  they  fall  short  of  the  liabilities 
by  $5,000,  hence  the  capital  is  impaired  in  the  amount  of  $5,000, 
and  this  explains  the  last  entry  on  the  statement  of  resources 
— it  simply  took  that  much  to  balance  the  liabilities.  We  now 
deduce  the  following  statement : 

937.  Authorized  Capital  $150,000 
Treasury  Stock?  (unsold)  50,000 


Paid-up  Capital  100,000 

Impairment  of  Capital  5,ooo 

Actual  Capital  (payable  in  Consoli- 
dated Stock)  $95,000 
From  this  v/e  see  that  the  stockholders  will   receive  95 
cents  on  the  dollar  for  their  stock,  or  95  cents  worth  of  new 
stock  for  every  dollar's  worth  of  the  old  stock. 


S24  COKPOEATION   ACCOUNTING 

Entries  to  Close  the  Books  of  the  Columbus 
Mining  Company. 

938.  First  Entry. 

The  Consolidated  Mascot 

Mining  Co.  Dr.  $108,000 

To  Mine  Account  $75,000 

"    Machinery  and  Tools  24,000 

"    Stores  and  Supplies  2,500 

Buildings  and  Lumber  1,500 

"    Water  Rights  1,000 

"    Amalgam  and  Ore  1,500 

"    Cash  2,500 

For  appraised  value  of  assets  transferred  to  The  Consol- 
idated Mascot  Mining  Company  as  per  bill  of  sale  and  reso- 
lution, etc. 

939.  Second  Entry. 

Profit  and  Loss  Account  Dr.  to 

Sundries  $17,000 

To  Mine  Account  $15,000 

"    Machinery  and  Tools  1,000 

"    Buildings  and  Lumber  500 

"    Water  Rights  50a 

For  loss  on  above  resources  as  shown  by  appraisers,  state- 
ment: 

(This  entry  balances  these  four  accounts). 

940.  Third  Entry. 


Sundries  Dr.  to  Sundries. 

Capital  Stock 

$150,000 

Surplus  Account 

12,000 

Bills  Payable 

5,000 

Wages  Due 

8,000 

To  Treasury  Stock 

$  50,000 

"    Profit  and  Loss 

17,000 

"    The  Consolidated  Mascot  M.  Co. 

108,000 

This  balances  all  the  accounts  on  the  Columbus  Mining 
Company's  books. 


AND    CORPORATION   LAW  325 

941.  It  will  be  noticed  that  the  Consolidated  Company  was 
to  assume  all  the  liabilities  of  the  Columbus,  and  these  liabili- 
ties are : 

Bills  Payable  $5,ooo 

Accrued  Wages  5,ooo 

Capital  Stock,  appraised  value  (due 

stockholders  $95,000 


Total  Liabilities  $105,000 

942.  Substitute  for  Third  Entry. 

Instead  of  the  Third  Entry,  the  following  entries  may  be 
made. 

First. 

Capital  Stock  Dr.  $150,000 

To  the  Consolidated  M.  M.  Co.  95,ooo 

Appraised  value  of  stock. 
Treasury  Stock  50,000^ 

Formerly  credited  to  Capital 

Stock. 
Profit  and  Loss'  5,ooo 

Impairment  of  Capital   now 

charged    to     Capital     Stock 

Account. 

943.  This  entry  balances  the  Capital  Stock  and  Treasury 
Stock  Accounts,  and  credits  the  account  opened  with  the  con- 
solidation for  the  amount  of  stock  it  is  to  issue  for  the  net 
capital  of  the  Columbus  Company  and  it  reduces  Profit  and 
Loss  Account  to  $12,000. 

944.  Second. 

Sundries  Dr.  to  Consolidated 

M.  M.  Co.  $13,000^ 

Bills'  Payable  $5,ooo 

Accrued  Wages  8,000 

945.  This  entry  balances  all  the  liabilities  and  also  the  ac- 
count opened  with  the  Consolidated  Company;  the  only  ac- 
counts now  open  are  Surplus  Account,  which  is  credited  with 
$12,000,  Profit  and  Loss  which  is  debited  with  $12,000,  and 
these  are  closed  by  the  following  entry : 

Surplus  Account  $12,000 

To  Profit  and  Loss  Account  $12,000- 


326  CORPORATION   ACCOUNTING 

Entries  to  Open  the  Books  of  the  Consolidated 
Mascot  Mining  Company. 

946.     Statement  of  Assets   and   Liabilities   at   commence- 
ment of  business. 

ASSETS  APPRAISED. 


Company- 

Mines 

Mach'y 

Stores 

Build- 
ings 

Water 
Right 

Real 
Estate 

Amal- 
gam 

Cash 

Total 

Mascot  

Columbus 

$75,000 
75,000 

130,000 
24,000 

?2,000 
2,500 

12,000 
1,500 

$1,000 
1,000 

$1,000 

$3,000 
1,500 

$6,000 
2,500 

$120,000 
108,000 

150,000 

54,000 

4,500 

3,500 

2,000 

1,000 

4,500 

8,500 

228,000 

LIABILITIES. 


Company 

Capital 
Stock 

Accounts 
Payable 

Bills 
Payable 

Wages  Due 

Totals 

Mascot           

$110,000 
95,000 

$5,000 

$5,000 

$5,000 
8.000 

$120,000 
108,000 

205,000 

5,000 

5,000 

13,000 

228,000 

947.  A  statement  in  this  form  can  be  made  up  for  any 
number  or  class  of  constituent  corporations  entering  a  merger. 
The  headings  vary  with  the  nature  of  the  business.  It  is  from 
this  statement  that  the  opening  entries  are  formulated. 

948.  Condensed  Statement  Mascot  Mining  Co. 

Appraised  value  of  assets  of  The  M.  M.  Co.     $120,000 
Liabilities,  exclusive  of  Capital  Stock  10,000 


Value  of  stock  to  be  used  to  stockholders        $110,000 


949.     Condensed  Statement  Columbus  Mining  Co. 

Appraised  value  of  assets  of  C.  M.  Co.  $108,000 

Liabilities  exclusive  of  Capital  Stock  13,000 

Value  of  stock  to  be  issued  to  stockholders      $95,000 


AND   CORPORATION   LAW  327 

950.  First  Entry. 

Sundries  Dr.  to  Capital  Stock  $250,000 

The  Mascot  Mining  Company  $110,000 

The  Columbus  Mining  Company  95,000 

Unsubscribed  Treasury  Stock  45,ooo 

For  1,100  shares  and  950  shares  issued  respectively  to  The 
Mascot  Mining  Company  and  The  Columbus  Mining  Com- 
pany, for  property  of  said  companies  transferred  to  The  Con- 
solidated Columbus-Mascot  Mining  Company,  per  deeds,  etc., 
on  file,  etc.,  and  minutes,  page.  . . .,  also  4,500  shares  reserved 
to  be  sold  as  the  directors  may  order. 

951.  Second  Entry. 

Sundries  Dr.  to  Sundries. 

Mines  The  Mascot  $75,ooo 

The  Columbus         75,ooo  $150,000 

Machinery  &  Tools   By  Mascot  Co. 

By  Columbus  Co. 

Stores  &  Supplies      By  Mascot  Co. 

By  Columbus  Co. 

Buildings  Etc.  By  Mascot  Co. 

By  Columbus  Co. 

Water  Rights  By  Mascot  Co. 

By  Columbus  Co. 

Real  Estate  By  Mascot  Co. 

Amalgam  and  Ore     By  Mascot  Co. 

By  Columbus'  Co. 

Cash  By  Mascot  Co. 

By  Columbus  Co. 

To  Accounts  Payable — Mas- 
cot Company 
Bills     Payable  —  Columbus 

Company 
Wages  Accrued — Mascot  Co. 
Columbus  Co. 

The  Mascot  Mining  Co.  110,000 

Net     value     of     property 
transferred. 
The  Columbus  Mining  Co.  95.000 

Net     value     of     property 
transferred. 


30,000 

24,000 

54,000 

2,000 

2,500 

4,500 

2,000 

1,500 

3,500 

1,000 

1,000 

2,000 

1,000 

3,000 

1,500 

4,500 

6,OOQ 

2,500 

8,500 

$5,000 

5,000 

5,000 

8,500 

13,000 

328  CORPOEATION   ACCOUNTING 

For  Assets  and  Liabilities  of  The  Mascot  Mining  Company 
and  The  Columbus  Mining  Company  transferred  to  The  Con- 
solidated Mascot  Mining  Company  as  per  Bill  of  Sale,  Reso- 
lution, etc.,  see  minutes  of  first  meeting. 

952.  Note  I.  The  usual  preamble  would  of  course  pre- 
cede the  first  entry. 

953.  Note  2.  If  the  stock  coming  to  the  companies  form- 
ing the  Consolidated  Company  should  not  come  out  an  even 
number  of  shares,  and  it  is  not  desired  to  issue  fractional 
shares,  an  understanding  may  be  arrived  at  whereby  one 
would  receive  the  fraction  more  and  the  other  the  fraction  less 
than  it  was  entitled  to,  the  one  paying  and  the  other  receiving 
the  cash  difference;  a  similar  arrangement  could  be  made  re- 
garding the  distribution  of  stock  among  the  stockholders. 
Another  but  more  laborious  method  would  be  to  credit  each 
stockholder,  or  pay  them  in  cash  pro  rata  in  excess  of  the  even 
number  of  shares  issued  to  them. 

954.  Now  open  the  new  company's  Stock  Ledger,  keep 
separate  accounts  for  the  preferred  and  common  stock.  Issue 
certificates  to  the  owners  of  common  stock  and  preferred  cer- 
tificates to  the  owners  of  preferred  stock;  in  other  respects 
treat  all  acocunts  same  as  in  any  ordinary  corporation. 

955.  Another  way  to  open  the  books  of  the  Consolidated 
Mascot  Mining  Company,  showing  Assets  and  Liabilities 
same  as  in  the  foregoing  example : 

Sundries  Dr.  to  Sundries. 

Subscription  Account,  amount  subscribed     $205,000 
Unsubscribed  Treasury  Stock  45,ooo 

Mines — of  both  companies  $150,000 

Machinery  and  Tools — both  companies  54,ooo 

Stores  and  Supplies — both  companies  4,500 

Buildings  and  Lumber — both  companies  3,500 

Water  Rights — both  companies  2,000 

Real  Estate,  The  Mascot  Company  1,000 

Amalgam — both  companies  4,500 

•Cash — both  companies  8,500 

To  Capital  Stock  $250,000 

Accounts  Payable  Mascot  Co.  5,ooo 

Accrued  Wages — both  companies  13,000 

Subscription  Account,  paid  in  prop- 
erty of  both  companies  205,000 


$478,000    $478,000 


AND   CORPORATION   LAW  329 

956.  This  method  is  the  shortest,  but  the  first  method  is 
the  most  explanatory,  and  as  the  books  are  to  be  opened  but 
once  it  is  best  to  make  the  opening  entries  as  plain  and  as  ex- 
planatory as  possible — this  is  one  case  where  economy  should 
not  be  carried  too  far. 

957.  N.  B.  As  noted  so  many  times,  the  unsubscribed 
stock  does  not  have  to  appear  on  the  books,  and  it  would  be 
better  to  leave  it  out  and  drop  an  equal  amount  off  the  credit 
to  Capital  Stock. 

958.  Sometimes  the  names  of  all  the  stockholders  and  the 
amount  of  their  subscriptions  are  written  on  the  Journal,  but 
in  a  case  of  this  kind  such  a  practice  is  not  to  be  commended, 
and  where  the  names  are  numerous  it  is  to  be  condemned.  The 
subscribed  stock  is  fully  paid,  the  names  and  number  of  shares 
are  given  on  the  Stock  Ledger  and  it  is  wholly  unnecessary  to 
repeat  them  here. 


CHAPTER  XXXIV. 


Two  Companies  Consolidate  Their  Assets — Consolidation 
Assumes  No  Part  of  the  Liabilities — Issuing  $250,000  Stock 
Against  $228,000  Assets — Excess  Pro-rated  on  Basis  of  As- 
sets— Liquidating  Liabilities  With  Consolidated  Stock — Clos- 
ing the  Old  Corporations'  Books  and  Opening  the  Books  for 
the  Consolidation. 


959.  Suppose  that  The  Consolidated  Mascot  Mining  Com- 
pany had  taken  over  all  the  assets  of  the  two  companies,  but 
did  not  assume  any  part  of  their  liabilities,  that  each  of  the 
old  companies  had  to  liquidate  its  own  liabilities  and  that  the 
Consolidated  Company  was  to  issue  its  full  capital  to  the  old 
companies  in  consideration  of  the  assets  turned  over  by  them ; 
what  are  the  entries  to  open  the  books  of  the  new  company 
and  close  the  books  of  the  old,  it  being  understood  that  the 
old  companies  will  liquidate  their  liabilities  with  stock  of  the 
Consolidated  Company? 


330 


CORPORATION  ACCOUNTING 


960.  The  first  thing  to  do  is  to  find  out  how  much  stock 
each  of  the  old  companies  is  to  receive  for  the  assets'  it  turns 
over,  and  this  we  find  by  the  following  method : 

Par  value  of  Consolidated  Stock  $250,000 

Appraised  value  of  old  companies  assets     228,000 


Stock  to  be  issued  in  excess  of  assets 


22,000 


This  is  an  increase  of  9  37-57  per  cent  and  as  the  increase 
of  each  company  is  proportionate  we  arrive  at  the  following 
statement  by  simple  proportion. 

961. 


Constituent 
Companies 

Par  Value 
of  Stock 

Appraised 
Value  of  Assets 

Excess  of  Stock 
Over  Assets 

Amt.  of  Stock 
to  be  Issued 

Mascot  Co. 
Columbus  Co. 

$100,000.00 
150,000.00 

$120,000.00 
108,000.00 

$11,578.95 
10,421.05 

$131,578.95 
118,421.05 

Totals 

$250,000.00 

$228,000.00 

$22,000.00 

$250,000.00 

962.  We  now  have  the  amount  of  consolidated  stock  to  be 
issued  to  each  of  the  old  companies,  but  it  will  be  observed 
that  it  does  not  come  out  in  even  shares ;  and  as  all  of  the  stock 
is  to  be  issued  we  give  the  odd  share  to  the  company  whose 
balance  above  an  even  number  of  shares  is  the  largest  percent- 
age of  one  share — in  this  case  to  The  Mascot  Company,  whose 
balance  above  1,315  shares  is  $78.95. 

963.  Some  captious  critic  may  object  to  this  on  the 
ground  that  each  company  should  receive  its  exact  proportion ; 
but  the  proportion  of  each  stockholder  in  a  fraction  of  a  share 
is  so  infinitesimal  as  not  to  be  worthy  of  consideration,  much 
less  the  labor  and  trouble  involved ;  for  by  dispensing  with  this 
fractional  share  we  have  an  even  number  of  shares'  to  divide 
among  the  stockholders  of  each  company,  and  in  the  division 
each  stockholder's  portion  terminates  in  a  decimal  fraction  in- 
stead of  a  vulgar  fraction.  This  makes  the  division  easy  and 
also  makes  easy  the  apportionment  of  dividends;  further  no 
stockholder  loses  a  cent,  as  we  shall  see  later  on. 

964.  The  following  table  will  show  the  basis  of  distribu- 
tion of  the  consolidated  stock  to  the  several  stockholders  of 
the  old  corporation. 


AND   CORPORATION   LAW 


331 


965. 


Constituent  Companies 

Capital  Issued  by 
Old  Corporation 

Capital  to  be  Issued 
by  Mew  Corporation 

Percentage 
of  Increase 

Mascot 
Columbus 

$  80,000.00 
100,000.00 

$131,600.00 
118,400.00 

64M% 
18  2-5% 

Totals 

$180,000.00 

$250,000.00 

966.  That  is,  the  holder  of  every  dollar's  worth  of  Mascot 
stock  gets  $1.64^  in  Consolidated,  and  the  holder  of  every 
dollar's  worth  of  Columbus  stock  gets  $1.18  2-5  in  Consoli- 
dated; or  on  a  share  basis,  for  every  share  of  Mascot  stock 
there  is  issued  1.645  shares  of  Consolidated  and  for  every  share 
of  Columbus  stock  there  is  issued  1.184  shares  of  Consolidated. 

Opening  the  Consolidated  Co.  Books. 


967.     First  Entry. 


$250,000 


Sundries  Dr.  to  Capital  Stock 
Mascot  Mining  Co.,  1,316  shares  at  $100        $131,600 
Columbus  Mining  Co.,  1,184  shares'  at  $100       118,400 

Consolidated  Company's  stock  issued  to  the  above  com- 
panies in  payment  for  respective  assets  of  said  companies. 

968.  It  will  be  noted  that  the  Mascot  Company  has  re- 
ceived $21.05  worth  of  stock  more  than  it  is  entitled  to,  and 
The  Columbus  Mining  Company  has  received  $21.05  worth 
less,  so  The  Mascot  Company  pays  over  $21.05  fo^  "the  excess 
of  stock  received,  which  amount  is  in  turn  paid  over  to  The 
Columbus  Company. 

970.  Note :  The  above  entry  transfers  all  the  assets  of 
the  old  companies'  to  the  books  of  The  Consolidated  Company, 
balances  the  accounts  opened  with  the  old  companies  and 
credits  capital  stock  with  the  full  capital.  The  debit  on  Good- 
will or  Bonus  Account*  is  carried  on  the  books'  until  the  sur- 
plus is  large  enough  to  wipe  it  out,  or  it  is  gradually  written 
off. 


*Vide  paragraph  418. 


332 


CORPORATION   ACCOUNTING 


969.     Second  Entry. 


Sundries  Dr. 
Mnies 

Mascot 
Columbus 

Mascot 
Columbus 

Mascot 
Columbus 

Mascot 
Columbus 

Mascot 
Columbus 

Mascot 
Mascot 
Columbus 

Mascot 
Columbus 

fining  Co. 
[ining  Co. 

$75,000 
75,000 

$150,000 

Machinery 

30,000 
24,000 

54,000 

Stores 

2,000 
2,500 

4,500 

Buildings 

2,000 
1,500 

3,500 

Water  Rights 

1,000 
1,000 

2,000 

Real  Estate 
Amalgam 

3,000 
1,500 

1,000 

4,500 

Cash 

6,000 
2,500 

8,500 

Goodwill  or  Bonus 
To  Mascot  } 
Columbus  M 

22,000 

$131,600 
$118,400 

[.  $250,000    $250,000 

For  tangible  assets  and  goodwill  of  the  Mascot  and  Colum- 
bus Mining  Companies  transferred  to  The  Consolidated  Com- 
pany in  full  payment  for  consolidated  stock. 


Second  Method. 

971.  Suppose  that  the  directors  do  not  wish  a  Goodwill  or 
Bonus  Account  to  appear  on  the  books,  for  the  reason  that  it 
has  to  be  carried  on  the  books  as  an  asset  and  must  eventu- 
allly  be  written  off  into  Surplus  Account,  what  then? 

972.  In  such  an  event  they  have  to  place  an  increased 
or  fictitious  value  on  the  assets  of  the  company  equivalent  to 
the  amount  of  the  Goodwill  or  bonus.  We  will  now  suppose 
that  they  place  this  increased  value  on  the  mines,  and  then  we 
have  the  following  statement : 


AND   CORPORATION   LAW 


333 


973- 


The  Mascot  Mine 
The  Columbus  Mine 


Appraised 

Value 
$75,000.00 
75,000.00 


Increased 

Value 
$86,578.95 

85,421.05 


$150,000.00     $172,000.00 


First  Entry  same  as  first  method. 

974.     Second  Entry. 

Sundries  Dr. 

Mines — both  companies  $172,000 

Machinery — both  companies  54,ooo 

Stores,  etc. — both  companies  4,500 

Buildings — both  companies  3,5oo 

Water  Rights — both  companies  2,000 

Real  Estate — The  Mascot  Co.  1,000 

Amalgam — both  companies  4,500 

Cash — both  companies  8,500 
To  Mascot  Mining  Company 
To  Columbus  Mining  Company 


$131,600 
118,400 


$250,000   $250,000 
(With  explanations.) 

Closing  the  Mascot  Books. 

995.     Following  are  the  book  values  of  all  accounts"  stand- 
ing open  on  the  books  of  the  Mascot  Mining  Company : 


Assets. 

Liabilities. 

Mine 

Machinery,  etc. 
Stores,  etc. 
Buildings,  etc. 
Water  Rights 

$50,000 

40,000 

1,500 

1,500 

1,000 

Capital  Stock 
Accounts  Payable 
Wages  Due 
Surplus  Account 

$80,000 

5,000 

5,000 

14,000 

Real  Estate 

1,000 

Amalgam 
Cash 

3,000 
6,000 

Total 

Total 

104,000 

104,000 

334  CORPORATION   ACCOUNTING 

967.     First  Journal  Entry. 

Consolidated  Stock  Dr.  $131,600 


To  Mine  Account 

$50,000 

Machinery  and  Tools 

40,000 

Stores  and  Supplies 

1,500 

Buildings  and  Lumber 

.    1,500 

Water  Rights 

1,000 

Real  Estate 

1,000 

Amalgam 

3,000 

Cash 

6,000 

Columbus  Mining  Co.,  balance  due 

on  fractional  part  of  share 

21.05 

Profit  and  Loss 

27.578.95 

For  excess  of  Consolidated  Stock 

received  over  all  resources. 

$131,600  $] 

[31,600.00 

977. 

Second  Journal  Entry. 

Sundries  to  Consolidated  Stock 

$10,000 

Accounts  Payable                                   $5,ooo 

Accrued  Wages                                       5,ooo 

For 

accounts   and  wages'  paid  with    Consolidated   Stock 

at  par. 

978.  If  it  is  found  impractical  to  liquidate  with  stock,  or, 
if  the  creditors  of  the  company  insist  on  cash,  the  company 
will  be  obliged  to  sell  sufficient  of  its  stock  to  pay  its  obliga- 
tions ;  or  if  the  creditors  insist  on  taking  the  stock  at  a  dis- 
count, Consolidated  Stock  will  have  to  be  credited  for  the 
amount  of  stock  so  paid  and  Profit  and  Loss  debited  for  the 
par  value  of  the  amount  paid  over  the  liabilities. 

979.  Third  Entry. 

Sundries  to  Consolidated  Stock  $121,600 

Capital  Stock  $80,000 

Surplus  Account  14,000 

Columbus  Mining  Co.,  cash  col- 
lected from  stockholders  and 
paid  over  for  fraction  of  share  21.05 

Profit  and  Loss  27,578.95 

To  balance  Profit  and  Loss  Ac- 
count for  net  gain  of  the 
Mascot  Mining  Company: 

$121,600.00  $121,600.00 


AND   CORPORATION  LAW 


335 


This  balances  all  the  accounts  of  The  Mascot  Mining  Com- 
pany and  the  company  is  merged  into  The  Consolidated  Com- 
pany and  ceases  to  exist. 

980.  The  debit  and  credit  to  the  Columbus  Mining  Co. 
for  fractional  share  are  necessary  to  balance  the  books.  As 
this  is  less  than  2  cents  a  share,  either  way,  on  the  new  issue 
of  stock  it  matters  little  whether  it  is  actually  collected  and 
paid. 

Closing  the  Columbus  Books. 

981.  Following  are  the  book  values  of  all  accounts  stand- 
ing open  on  the  books  of  The  Columbus  Mining  Company : 


Assets. 

Liabilities. 

Mine, 

$90,000 

Capital  Stock 

$150,000 

Machinery,  etc. 

25,000 

Bills  Payable 

5,000 

Stores,  etc. 

2,500 

Wages  Due 

8,000 

Buildings,  etc. 

2,000 

Surplus  Account 

12,000 

Water  Rights 

1,500 

Amalgam 

1,500 

Cash 

2,500 

Treasury  Stock 

50,000 
175,000 

175,000 

982.  First  Journal  Entry. 

Capital  Stock  Dr.  $50,000 

To  Treasury  Stock  $50,000 

For  5,000  shares  of  unsold  stock. 
This  entry  balances  the  Treasury  Stock  Account  and  re- 
duces the  Capital  Stock  Account  to  $100,000,  which  is  the 
paid-up  capital  of  the  company. 

983.  Second  Entry. 

Consolidated  Co.'s  Stock  Dr.       $118,400.00 

For  1,184  shares  received. 
Cash — received  from  Mascot  Co.  21.05 

Profit  and  Loss  6,578.95 

For  depreciation  in  assets. 
To  Mine  Account  $90,000 

Machinery,  etc.  25,000 

Stores,  etc.  2,500 

Buildings,  etc.  2,000 

Water  Rights  1,500 

Amalgam  1,500 

Cash  2,500 


$125,000.00   $125,000 


Assets  turned  over  to  Consolidated  Co. 


336  CORPORATION   ACCOUNTING 

984.  The  $21.05  ii^  cash  received  from  the  Mascot  Com- 
pany must  now  be  distributed  among  the  stockholders.  When 
this  is  done  the  Cash  Account  will  balance  and  also  all  the 
Resource  accounts. 

985.  Inasmuch  as  the  above  amount  is  incommensur- 
able with  the  labor  involved  in  its  collection  and  distribution 
the  work  may  be  theoretically  performed  without  cavil  or 
criticism. 

986.  Third  Entry. 

Sundries    to    Consolidated 

Co.'s'  Stock  $13,000 

Bills  Payable  $5,ooo 

50   shares    of    Consolidated 
Stock    issued    to    redeem 
Company's  notes. 
Accrued  Wages  8,000 

80  shares  of  stock  issued 
(or  sold)  to  pay  wages 
due. 

987.  Fourth  Entry. 


Sundries  to  Sundries. 

Capital  Stock                             $100,000.00 

Surplus  Account                            12,000.00 

To  Consolidated  Co.'s  Stock 

$105,400.00 

Balance  after  paying  lia- 

bilities. 

Cash   distributed  to  stock- 

holders 

21.05 

Profit  and  Loss' 

6,578.95 

To  balance  Profit  and  Loss 

Account  for  net  loss  of 

Columbus  Co. 

$112,000.00     $112,000.00 

This'  closes  the  books  of  The  Columbus  Mining  Company 
and  the  company  goes  out  of  business. 


All  the  work  connected  with  this  fractional  share 
could  be  eliminated  by  adjusting  the  appraisement  so  as  to 
have  the  stock  come  out  in  even  shares  to  each  company. 

989.     While  the  number  of  companies  and  the  number  of 
accounts  involved  in  the  preceding  examples  have  been  lim- 


AND    CORPORATION   LAW  337 

ited  for  convenience  sake,  it  is  thought  that  the  principles  in- 
volved in  consolidation  are  so  clearly  set  forth  by  explanation 
and  illustration  as  to  make  it,  to  him  who  masters  them,  not 
a  question  of  skill  but  of  labor  in  consolidating  any  number  of 
corporations  with  more  varied  divisions  of  assets  and  liabili- 
ties. 


CHAPTER  XXXVI. 


...  A  Merging  of  Interests  Vv/^ithout  a  Merging  of  Capital — 
Co-operation  vs.  Competition — Interests  of  Forty  Corpora- 
tions Unified  in  One — Individual  Corporate  Entity  Preserved 
— Ends  Accomplished  by  Means  of  Selling  Agency — Organiz- 
ing a  Selling  Agency — Pro-rating  Sales — Accounts  of  Consti- 
tuent Companies. 


990.  It  is  an  old  proverb  that  "Competition  is  the  life  of 
trade,"  but  we  know  from  experience  that  it  frequently  makes 
for  the  destruction  of  the  traders.  When  a  number  of  persons 
engaged  in  the  same  line  of  business  are  all  hunting  for  .the 
buyer,  the  buyer  usually  gets  what  he  wants  for  what  he 
wishes  to  pay  for  it.  A  knowledge  of  this  condition  and  its' 
destructive  tendencies  has  resulted  in  bringing  competitors 
together  for  an  understanding  and  an  agreement  to  protect 
their  joint  and  several  interests'.  Take  for  instance  the  oil 
producers  of  California.  A  few  years  back  when  a  number  of 
oil  producing  properties  came  into  the  market  with  their  pro- 
duct, they  were  all  so  anxious  to  sell  their  product  to  the  rail- 
roads and  other  large  consumers,  that  the  price  of  fuel  oil 
dropped  to  a  profitless  point.  It  was  then  that  a  co-operative 
selling  agency  was  formed  somewhat  on  these  lines. 

991.  Some  thirty-five  or  forty  oil  companies"  formed  a  new 
corporation  whose  purpose  is  "to  secure  a  stronger  and  more 
stable  market  for  fuel  oil,  by  selling  through  a  common  agency 
the  product  of  many  oil  yielding  properties ;  to  lessen  the  cost 
of  producing,  storing,  handling,  shipping  and  selling  such 
product,  etc." 


338  CORPORATION   ACCOUNTING 

992.  Every  subscriber  to  the  stock  of  this  new  corporation 
must  be  a  bona  fide  producer  of  oil,  and  subscriptions  may  be 
made  directly  in  the  name  of  the  beneficial  corporation,  or  in 
the  name  of  designated  trustees  for  said  corporations.  Every 
subscribing  corporation  is  to  be  represented  on  the  board  of 
directors,  and  new  members  can  be  admitted,  or  transfers 
made,  only  on  the  approval  of  the  Board.  Each  constituent 
corporation  shall  own  one  share  of  stock  in  the  composite  and 

no  more.  A  share  is  issued  to  each  component  stockholder 
on  the  payment  of  the  par  value,  and  its  executing  to  the  sell- 
ing corporation  a  lease  of  its  properties,  and  a  contract  to  de- 
liver its  product  to  said  selling  agency.  The  lessee  then  issues' 
to  each  lessor,  for  a  consideration,  a  license  to  operate  its  prop- 
erties, and  the  product  of  these  properties  is  delivered  to  the 
selling  corporation,  the  board  of  directors  of  which  ''shall  have 
power  to  apportion  and  divide  all  orders  received  by  the  cor- 
poration among  the  various  oil  producers  holding  licenses 
*  *  *  and  such  apportionment  shall  be  based  upon  the  'oper- 
ators pro-rata'  fixed  upon  and  agreed  between  the  corporation 
and  such  operator."  A  new  pro-rata  may  be  fixed  from  time 
to  time  according  to  the  demands  of  the  market.  It  is  pre- 
sumed that  the  Selling  Agency  shall  charge  a  fixed  percentage 
to  each  beneficial  corporation.  In  this  way  they  all  pay  in 
proportion  to  the  service  received. 

993.  Suppose  the  capital  stock  of  the  selHng  corporation 
to  be  $50,000,  divided  into  50  shares  of  $1,000  each,  and  that 
forty  companies  subscribe  for  (i)  share  each,  what  are  the 
opening  entries? 

994.  Subscription  Account  Dr.  $40,000 

To  Capital  Stock  $40,000 

40  shares  subscribed  as  follows : 
Gusher  Oil  Co.        i  Share. 
Big  Flow  Oil  Co.    i  Share. 

and  so  on  to  the  end  of  the  list. 

994  (a).  As  the  individual  companies  pay  for  their  stock, 
credit  Subscription  Account  from  the  Cash  Book. 

995.  This  $40,000  forms  the  Working  Capital  of  the  sell- 
ing corporation,  and  enables  it  to  provide  storage  facilities, 

equip  offices  ,establish  trade  relations,  and  generally  serve  the 
best  interests  of  its  stockholders.  If  it  should  need  additional 
capital  at  any  time,  to  protect  its  interests  or  develop  and  ex- 
tend its  trade,  it  can  obtain  it  by  levying  an  assessment.  Its' 
accounting  with  its  stockholding  corporations  can  be  done  in 


AND   CORPORATION   LAW  339 

one  of  three  ways.  It  may  treat  all  deliveries  as  consign- 
ments, rendering  an  "Account  Sales  Statement"  as  sales  are 
made,  and  charging  the  usual  commission  for  its  service;  or 
it  may  keep  a  record  of  deliveries,  that  is,  of  the  number  of 
barrels  delivered  by  each  corporation,  and  also  a  record  of 
the  number  of  barrels  sold  for  each  corporation,  so  as  to  be 
able  to  teir  the  number  of  barrels  on  hand  for  account  of  each. 
This  record  or  account  would  deal  with  quantities  only — not 
with  values. 

As  sales  are  made  for  account  of  any  particular  member; 
that  particular  member  is  credited  with  the  proceeds'  and 
charged  with  the  usual  commission ;  or  if  all  the  oil  was  of  the 
same  test,  that  is  the  same  specific  gravity,  etc.,  one  sales  ac- 
count might  be  kept  for  the  proceeds  of  all  sales,  and  from 
time  to  time  there  could  be  a  distribution  of  these  proceeds 
in  the  ratio  that  the  sales  bear  to  the  quantities  delivered. 

997.  For  example,  let  us  suppose  that  5000  barrels  of  oil 
were  delivered  to  the  Selling  Agency  and  1000  barrels  sold, 
and  that  these  deliveries  were  made  in  the  following  propor- 
tion : 

A         2000  barrels. 
B  1500       " 

C  1000      " 

D  500      '' 

Total  Delivered  5000  barrels.       Total  sold    1000  barrels. 

998.  This  means  that  1-5  the  delivery  was  sold,  and  that 
each  delivering  company's  proportion  of  the  sale  was  1-5  of  its 
delivery. 


A 

400  barrels. 

B 

300      " 

C 

200      " 

D 

100       " 

Tota 

1     1000  barrels. 

999.  The  selling  corporation  distributes  the  proceeds  of 
sales  in  one  of  two  ways.  It  debits  Sales  Account  and  credits 
ekch  member  for  its  proportion,  in  turn  debiting  each  of  them 
and  crediting  Commission  Account  for  commission;  or  it 
debits  Sales  Account  and  credits  Commission  Account  in  one 


340  CORPOKATION   ACCOUNTING 

sum  for  the  total  commission,  and  then  debits  Sales  Account 
and  credits  each  member  for  its  proportion  of  the  balance  thus  : 

looo.     Sales  Account  Dr. 

To  Commission  Account, 
for  Commission  of.  . .  .%  on  lOOO  barrels  of  oil 
sold  at per  barrel. 

looi.     Sales  Account    Dr. 
To  Sundries, 
(here  give  names). 
for  their  respective  proportions  of  the  proceeds  of  sale  of  lOOO 
barrels  of  oih 

1002.  It  should  be  understood  that  the  directors  fix  the 
pro-rata  sales  of  each  company,  and  the  companies  regulate 
their  deliveries  accordingly. 

1003.  The  Commission  Account  becomes  the  Trading  Ac- 
count* of  the  Selling  Agency,  and  if  its  revenues  are  in  excess 
of  its  requirements,  it  can  distribute  its  surplus  in  dividends 
to  its  stockholders'. 

Accounting  for  Constituent  Companies. 

1004.  When  a  company  purchases  stock  in  the  Selling 
Agency  it  makes  the  following  entr37^  in  its  Cash  Book. 


Stocks  $I,CXXD 

I  share  of  stock 

in Selling  Agency. 


1005.  When  it  delivers  oil  to  the  agency,  it  can  treat  its 
delivery  as  a  consignment,  and  sales  as  consignment  sales ; 
or  it  can  treat  its  delivery  as  a  "Manufactured  Product  Ac- 
count,"*^ and  credit  "Sales  Account"  for  the  proceeds  of  sales. 
It  is  best  to  credit  sales  v^ith  the  gross  proceeds,  and  to  debit 
a  Commission  Account  for  the  commission  paid  the  agency — 
this  commission  is  a  selling  expense,  and  the  gross  sales  and 
selling  expense*^  should  be  kept  track  of  for  statistical  and 
comparative  purposes. 

*Vide  paragraph  419. 

* 2 Vide  paragraph  422. 

*3Vide  paragraphs  407  and  409. 


CHAPTER   XXXVIL 

A  Mining  Corporation  Going  Into  Partnership  With  An 
Individual — Opening  the  Books — Entries  Made  By  Mining 
Company — Adjusting  Profits — Increasing  Investment. 


1006.  Suppose  that  the  Gold  Hill  Mining  Company  desires 
to  go  into  partnership  with  J.  B.  King  in  the  cattle  business, 
under  the  name  of  J.  B.  King  &  Co. ;  Articles  of  partnership 
are  drawn  up  in  the  usual  form,  and  after  Mr.  King's  affairs 
have  been  inventoried,  the  partnership  books  are  opened  by 
the  following  entries  in  the  Journal:     (Usual  preamble). 

1007.  Mr.  King's  Investment. 

Assets. 


Live  Stock 

$10,000 

Personal  accounts  owing  to  him 

5,000 

Bills  Receivable 

3,000 

Cash 

2,000 

Goodwill 

2,500 

Liabilities. 

Accounts  Payable 

$2,000 

Bills  Payable 

3,000 

J.  B.  King  (net  investment 

17.250 

Reserve  for  bad  debts 

250 

22,500       22,500 

1008.  Gold  Hill  Mining  Company's  Investment. 

Cash  $17,500 

To  Gold  Hill  Mining  Company  $17,500 

(Net  investment.) 

1009.  Cash  is  now  ''checked"  in  the  Journal  and  entered 
in  the  ''Total  Column"  in  the  Cash  Book.  The  other  accounts 
are  posted  to  the  Ledger,  a  Stock  Account  being  open  for  each 
partner,  and  the  partnership  books  are  now  open. 


342  COKPORATION   ACCOUNTING 

loio.     The  following  entry  is  then   made  in  the  mining 
company's  Cash  Book: 

Cash  Book. 


Partnership  investment  $17,500 
Invested  with  J.  B. 
King  &  Co.,  in  the 
cattle  business,  per 
resolution  of  the 
Board,  etc. 


loii.  An  Investment  Account  is  now  opened  in  the  min- 
ing company's  Ledger,  and  debited  with  the  amount  of  the  in- 
vestment.   Vide  paragraphs  434-35. 

1012.  In  a  business  like  this  there  is,  of  course,  only  one 
active  partner,  and  he  is  allowed  a  salary  for  his  services.  A 
Private  Account  is  opened  for  each  partner  in  the  partnership 
books,  aside  from  their  stock  accounts,  and  these  accounts 
are  charged  for  all  sums  drawn  out  by  the  partners,  and  bal- 
anced at  the  end  of  the  year  into  their  respective  stock  ac- 
counts. When  the  mining  company  draws  out  any  money, 
it  is  drawn  against  prospective  profits,  and  is  not  supposed  to 
reduce  its  original  investment.  In  this  case  the  mining  com- 
pany debits  cash  on  its  Cash  Book  and  credits  the  partnership. 
It  is  best  not  to  credit  Profit  and  Loss  until  the  actual  result 
of  the  partnership  trading  is  determined,  and  the  profit  or  loss 
arising  from  the  partnership  should  be  separately  stated  on 
the  mining  company's  annual  statement. 

1013.  Suppose  that  at  the  end  of  the  first  year  the  partner- 
ship books  show  a  profit  of  $5000,  of  which  the  mining  com- 
pany's share  is  50%,  that  it  has  already  drawn  out  $1000,  de- 
sires to  draw  out  an  additional  $500,  and  increase  its  invest- 
ment in  the  partnership  by  $1000;  what  are  the  entries  on  the 
books  of  the  mining  company? 

First  Entry. 

1014.  Cash  Book. 


J.  B.  King  &  Co.  $500 

Received  from  partner- 
ship on  account  of 
profits. 


This  leaves  a  credit  of  $1500  on  the  account  of  J.  B.  King 
,&Co. 


AND   CORPORATION   LAW  34a 

Second  Entry. 

1015. 

Sundries'  Dr. 

J.  B.  King  &  Co.  $1,500 

Partnership  Investment  1,000 

To  Profit  and  Loss  $2,500 

Profit  from  investment  in  the  firm  of  J.  B.  King  &  Co.,. 
$1500  of  which  has  been  withdrawn,  and  $1000  reinvested. 

1016.  Note:  Partnership  Investment  Account  is  one  of 
the  resources  of  the  Gold  Hill  Mining  Company,  and  as  such 
appears  in  their  Statement  of  Resources. 

1017.  Many  partnership  articles  stipulate  that  a  certain 
percentage  shall  be  paid  or  credited  to  each  partner  on  his  in- 
vestment, before  an  apportionment  of  the  profits  are  made. 
In  such  cases  the  Private  Stock  Account,  or  Investment  Ac- 
count, of  each  partner  is  carefully  examined  for  investments 
and  withdrawals,  and  the  average  investment  calculated  for  the 
period.  It  is  on  this  average  that  interest  is  figured.  Other 
articles  provide  that  the  partners  shall  pay  or  receive  interest 
according  as  their  average  investm.ents  vary  below  or  above 
their  relative  investments  at  the  start;  certain  it  is  that  when 
their  withdrawals  differ  in  point  of  time  or  amount,  the  only 
equitable  way  to  adjust  the  division  of  profits  is  to  find  out  the 
average  investment  of  each  partner,  those  whose  investments 
have  fallen  below  the  proportionate  sum  on  which  the  division 
of  profits  was  originally  based,  pay  interest.  In  this  way  the 
rdtio  of  investment  is  maintained.  For  example,  A,  B  and  C 
are  in  partnership.  A's  investment  has  averaged  $1500  below 
his  original  contribution,  on  which  he  was  entitled  to  1-3  of 
the  profits ;  this  is  equivalent  to  him  drawing  out  $500  of  his 
own,  and  borrowing  $500  each  from  B  and  C.  By  loaning  this 
to  A,  they  equalize  their  investments'  again,  and  if  A  pays 
them  interest  on  this  sum,  he  is  entitled,  in  equity,  to  1-3  of 
the  profits.  He  can  either  pay  them  interest  on  $1000,  or  pay 
the  firm  interest  on  $1500  and  receive  back  1-3  of  it  in  the  di- 
vision of  the  profits. 


CHAPTER  XXXVIII. 

Dissolution  of  Corporations — Liquidating  the  Trade  Lia- 
bilities and  Redeeming  the  Capital  Stock — Involuntary  and 
Voluntary  Liquidation — Redeeming  Stock  for  Less  Than  Par 
— For  More  Than  Par — Liquidators  Buying  Up  the  Stock — 
Liquidation  Companies  and  How  They  Operate. 


1018.  The  ways  and  means'  by  which  corporations  are  dis- 
solved, are  provided  for  in  the  codes  and  statutes  of  the  dif- 
ferent states.  If  the  stockholders  of  a  corporation  wish  to 
dissolve  and  go  out  of  business  they  may  obtain  permission 
to  do  so,  providing  they  have  first  discharged  all  the  liabilities 
of  the  corporation.  Again,  some  corporations  find  themselves 
in  such  financial  difficulties  that  they  are  not  able  to  continue 
in  business,  and  they  ask  the  Court  to  appoint  a  Receiver  to 
wind  up  their  affairs ;  and  sometimes  the  creditors  of  corpora- 
tions ask  for  the  appointment  of  Receivers  to  protect  their  in- 
terests. The  Receiver  supersedes  the  officers  and  directors, 
and  takes  charge  under  the  direction  of  the  Court  of  all  the 
affairs  of  the  corporation.  He  makes  his  reports  to  the  Court, 
and  receives  his  salary  by  order  of  the  Court. 

1019.  As  the  assets  of  the  corporation  are  converted  into 
cash,  the  liabilities  of  the  corporation  are  liquidated,  the  cre'd- 
itors  sometimes  receiving  partial  payments  on  a  pro  rata  basis' 
— preferred  claims  are  paid  first.  When  all  the  outsanding 
debts  of  the  company  are  paid,  then  the  redemption  of  the 
stock  begins. 

1020.  Some  corporations  provide  in  their  by-laws  for  the 
manner  in  which  the  corporation  is  to  liquidate  at  the  expira- 
tion of  its  charter.  For  instance,  the  by-laws  may  provide  for 
the  appointment  of  a  committee  by  the  Board  of  Directors  in 

office  at  the  time,  to  liquidate  the  corporation's  liabilities'. 
They  proceed  in  the  same  manner  as  the  Receiver,  except  that 
they  are  employd  by  the  directors  instead  of  appointed  by  the 
Court,  and  they  receive  their  salaries  from  the  directors  and 
make  their  reports  to  the  directors  or  stockholders.  After 
having  satisfied  the  claims  of  creditors,  they  turn  their  atten- 
tion to  the  redemption  of  the  certificates  of  stock.  What  the 
sockholders'  will  get  for  their  stock  depends  on  the  value  of  the 


AND    CORPORATION    LAW  345 

remaining  assets  of  the  corporation,  and  the  cost  of  liquidating, 
and  this  is  called  the  "Intrinsic  Value"  of  the  stock. 

102 1.  Sometimes  the  liquidators  buy  up  the  stock  of  the 
company  after  its  debts  are  paid,  at  a  premium  or  a  discount 
as  the  case  may  be,  debiting  the  Capital  Stock  Account  for 
the  par  value  of  the  stock  purchased,  and  debiting  or  crediting 
''Premium  and  Discount"  Account,  or  Profit  and  Loss  Ac- 
count, for  the  gain  or  loss.  In  such  a  case,  the  stock  is  re- 
deemed at  once,  and  the  stockholders  and  corporation  cease 
to  exist  as  such — the  liquidators  forming  a  partnership  for  the 
sale  or  conversion  of  the  remaining  assets. 

1022.  For  illustration,  let  us  suppose  that  the  capital 
stock  of  a  corporation  was  $1000,  that  all  its  trade  liabilities* 
were  discharged,  and  that  it  still  had  on  its  books  assets 
amounting  to  $2000;  this  would  mean  a  surplus  of  $1000.  The 
liquidators  offer  to  the  stockholders  $150  a  share  or  $1500  net 
cash,  for  their  stock,  which  they  accept.  They  pay  into  the 
company  this  $1500,  debiting  cash  and  crediting  asset  ac- 
counts, or  Realization  and  Liquidation  Account;  the  balance 
of  $500  being  debited  to  Profit  and  Loss.  The  stockholders 
then  surrender  their  stock,  and  as  they  receive  the  money 
therefor  Capital  Stock  Account  is  debited  for  the  par  of  the 
stock,  the  Premium  Account  for  the  premium  paid.  When  all 
the  stock  has  been  surrendered,  the  Cash  Account  will  balance  ; 
the  Capital  Stock  Acocunt  will  balance,  and  there  will  be  a 
debit  balance  in  Premium  Account  of  $500.  There  is  also  a 
debit  balance  of  $500  in  the  Profit  and  Loss  Account.  These 
two  debits  of  $500  each  are  balanced  into  the  $1000  Credit  in 
Surplus  Account,  and  with  this,  all  the  accounts  on  the  books 
are  closed.  If  on  the  other  hand  the  Capital  Stock  was  $2000 
and  the  assets  on  the  books  were  $1500,  this  would  mean  a 
deficit  of  $500,  and  if  the  liquidators  paid  $1000  for  the  sur- 
render of  the  stock,  or  50c  on  the  dollar  of  par  value,  cash 
would  be  debited  for  $1000;  this  would  be  an  additional  loss 
of  $500  in  liquidating,  which  would  be  carried  to  Profit  and 
Loss  Acocunt.  Supposing  this  condition  to  exist,  cash  should 
be  credited  when  the  stock  is  surrendered,  and  Capital  Stock 
debited.  When  the  stock  has  all  been  surrendered  the  Cash 
Account  will  balance,  but  there  will  still  be  a  credit  on  Capital 
Stock  Account  of  $1000.  A  Journal  entry  is  then  made  debit- 
ing Capital  Stock  and  crediting  a  Discount  Account  for  $1000 
on  acocunt  of  the  discount  at  which  the  stock  was  purchased. 
There  will  then  be  a  credit  of  $1000  in  Discount  Account 
against  a  $500  debit  in  Deficit  Account,*  and  an  equal  debit 

Vide  paragraph  426.  \ 


346  CORPORATION   ACCOUNTING 

in  Profit  and  Loss  Account,  (unless  they  are  both  in  one  ac- 
count) and  a  simple  Journal  entry,  or  transfer  entry,  will  close 
these  accounts  and  wind  up  the  business. 

1023.  Sometimes  the  stockholders  are  paid  "capital  divi- 
dends" from  time  to  time  as  liquidation  progresses,  and  some- 
times there  is  no  distribution  until  all  the  assets  are  disposed 
of,  at  which  time  the  stockholders  are  paid  there  pro-rata  of 
the  amount  realized — unless  there  is  a  class  of  stock  having 
a  preference  in  liquidation.*  As  the  stock  is  redeemed  and  paid 
for,  cash  is  credited  and  Capital  Stock  Account  debited. 

1024.  If  the  amount  realized  on  the  stock  is  less  than  par, 
a  Journal  entry  should  be  made,  debiting  Capital  Stock  with 
the  balance,  and  crediting  Profit  and  Loss  or  "Impairment" 
account,  or  whatever  other  account  represents  the  net  loss. 
This  last  entry  will  close  all  the  accounts  on  the  books.  For 
example,  let  us  suppose  that  the  capital  stock  of  a  company 
is  $100,000,  and  the  Profit  and  Loss  or  "Impairment  of  Cap- 
ital"* account  shows  a  debit  balance  of  $100,000  at  the  time  of 
closing  the  books,  and  in  liquidating  they  lose  another  $5,000, 
that  is,  the  net  realization  on  their  assets,  after  all  their  debts 
are  paid,  is  $15,000  less  than  the  capital  stock.  In  this  case 
Profit  and  Loss  or  "Impairment  Account"  is  charged  with  the 
loss  of  $15,000,  the  stockholders  are  paid  the  $85,000,  and  this 
is  charged  to  Capital  Stock  Acocunt,  leaving  a  credit  balance 
of  $15,000  on  this  account;  and  we  have  seen  that  there  is  a 
debit  balance  of  $15,000  on  Profit  and  Loss  or  Impairment  Ac- 
count, so  a  simple  Journal  entry  closes  the  books. 

1025.  Capital  Stock  $15,000 

To  Profit  and  Loss  (or  Impairment)  $15,000 

1026.  Suppose  on  the  other  hand  that  at  the  closing  of  the 
books  there  was  a  credit  of  $15,000  in  Surplus  Acocunt,  and 
that  the  shrinkage  and  costs  of  liquidating  were  $5000,  there 
would  be  left  in  the  Surplus  Account  a  balance  of  $10,000.  This 
means  that  the  stockholders  would  receive  110%  on  their 
stock.  When  this  $110,000  is  pro-rated  among  the  stockhold- 
ers', cash  is  credited  and  Capital  Stock  is  debited.  There  would 
then  be  a  debit  balance  of  $10,000  in  the  Capital  Stock  Ac- 
count, which  would  be  offset  by  the  $10,000  credit  in  Surplus 
Account,  and  the  books  would  be  closed  by  this  entry  : 

1027.  Surplus  Account  Dr.  $10,000 

To  Capital  Stock  Acocunt  $10,000 

*Vide  paragraph  49. 
*2Vide  paragraph  425. 


AND   COKPORATION   LAW  347 

1028.  In  any  event  the  stockholders  should  be  required  to 
surrender  their  certificates  endorsed  in  some  such  form  as  the 
following : 


1029.         Surrendered  by 

this day  of A.  D.  i 

Signed 


1030.  At  the  present  time  there  are  many  "Corporation 
Liquidation  Companies,"  whose  business  is  to  buy  up  the  as- 
sets of  defunct  and  insolvent  corporations  and  liquidate  their 
liabilities,  including  the  Capital  Stock.  They  are  heavily  cap- 
italized, employ  a  corps  of  skilled  accountants  and  appraisers, 
and  relieve  corporate  directors  and  trustees  of  the  delay  and 
worry  incident  to  liquidation.  In  effect,  they  pay  the  stock- 
holders so  much  for  their  stock  and  take  over  everything. 

103 1.  For  further  particulars  as  to  liquidation  and  realiza- 
tion see  paragraph  430  et  seq. 


CHAPTER  XXXVII. 


Origin  of  Banking — Functions  of  a  Modern  Bank — How 
Banks  Develop  a  Community  Foster  Industries  and  Promote 
Trade  and  Commerce — The  Foundation  of  International 
Comity — Foreign  and  Domestic  Exchange — Letters  of  Credit 
— The  Balance  of  Trade  and  International  Settlements — Or- 
ganization of  National  Banks — Bonds  and  Currency — System 
of  Reports  to  Comptroller — Statement  of  Earnings  and  Divi- 
dends— Bank  Examinations — Lawful  Reserve  and  How  to 
Compute  It — Profits  on  Circulation — Commercial  and  Accu- 
rate Interest — Short  Interest  Rules — Compound  Interest — 
True  and  False  Discount. 


Origin  of  Banking. 


1032.  Some  of  the  historians  of  finance  tell  us  that  the 
word  bank  is  derived  from  the  Italian  word  ''Banco,"  meaning 
bench ;  the  most  primitive  attempt  at  banking  being  made  by 
the    Jews    of    Lombardy    in    the    twelfth    century,    who    had 


348  CORPORATION   ACCOUNTING 

benches  in  the  market  places  at  which  they  loaned  money,  or 
sold  credit.  Others  claim  that  it  was  applied  to  a  pile  or  heap 
of  money  in  the  same  analogous  sense  in  which  we  say,  a  bank 
of  earth,  a  bank  of  clouds,  a  bank  of  snow ;  however  that  may 
be,  everybody  in  this  age  knows  what  a  bank  is,  and  knows  at 
least  some  of  the  functions  of  a  modern  bank. 

A  Brief  Review. 

1033.  This'  chapter  must  necessarily  be  a  very  brief  review 
of  some  of  the  functions  of  a  bank,  the  manner  in  which  it 
serves  the  public  and  conserves  their  interests,  the  care  with 
which  it  attends  to  its  customers  business,  the  safeguards  it 
throws  around  their  funds'  and,  generally,  its  indispensibility 
to  trade  and  commerce. 

Classification  of  Banks. 

1034.  Banks  in  this  country  are  divided  into  two  main 
classes — National  Banks  and  State  Banks.  The  former  are 
chartered  by  the  National  Government,  governed  by  the  Na- 
tional Bank  Act,  and  are  under  the  immediate  supervision  of 
the  Comptroller  of  the  Currency.  The  latter  are  chartered  by 
the  States,  governed  by  State  laws  regulating  the  business  of 
banking,  and  are  under  the  immediate  supervision  of  a  Board 
of  Bank  Commissioners.  Besides  the  ordinary  commercial 
banks,  State  laws  provide  for  the  creation  of  Savings  Banks 
and  Trust  Companies,  and  also  Private  Banks. 

Influence  on  Civilization. 

1035.  It  is  not  too  much  to  say  that  there  would  be  no 
modern  civilization  without  banks.  Banks  are  the  chief  agency 
in  the  development  of  a  community ;  they  are  the  means  of  the 
promotion  of  industry  and  commerce;  they  are  the  medium 
through  which  the  world's  commerce  is  conducted,  through 
which  great  industrial  enterprises  employing  millions  of  men 
are  sustained.  The  needs  of  these  millions  are  supplied  by 
the  product  of  their  labor  and  their  very  needs  create  new 
enterprises  for  their  supply,  such  as  stores,  factories,  schools, 
colleges,  churches,  other  banks  and  savings  institutions.  Com- 
merce links  the  ends  of  the  earth  together  and  forms  a  federa- 
tion of  the  whole.  Without  commerce  the  world  would  be 
stagnant,  unprogressive.  Without  banks  there  could  be  no 
commerce  in  the  sense  in  which  modern  civilization  under- 
stands it.    It  is'  the  ramifications  of  trade  that  makes  the  world 


AND   CORPORATION   LAW  349 

cosmopolitan.  It  was  the  development  and  protection  of  this 
trade  that  formed  the  foundation  for  international  comity  and 
international  fellowship. 

Foreign  Bills  of  Exchange. 

1036.  Suppose  a  New  York  man  makes  a  shipment  of 
wheat  to  London,  how  does  he  get  his  money?  Does  he  have 
to  wait  until  the  wheat  arrives  in  London  and  is  paid  for,  and 
the  money  brought  back  to  him ;  or  if  it  is  sold  on  60  or  90  days 
time,  does  he  have  to  wait  those  60  or  90  days  for  his  money? 
No  indeed.  He  simply  draws  a  bill  of  exchange  to  his  order, 
either  on  his  customer  or  an  authorized  bank,  and  takes  this 
to  one  of  the  banks  doing  a  foreign  business.  This  bank  dis- 
counts his  bill  and  he  gets  his  money  at  once.  The  bank  then 
sends'  it  to  its  London  correspondent,  which  correspondent 
presents  it  to  the  consignee  or  drawee  and  gets  the  money, 
crediting  its  New  York  correspondent.  The  New  York  im- 
porter buys  goods  in  London  and  the  exporter  draws  a  bill  of 
exchange  on  New  York.  The  New  York  correspondent  of  the 
London  bank  collects  this  bill  of  exchange  and  credits  the 
London  bank. 

Balance  of  Trade. 

1037.  If  there  was  only  one  bank  in  London  and  one  in 
New  York  doing  a  foreign  business  these  bills  would  offset 
each  other,  and  only  their  difference  would  be  owing  from  one 
bank  to  the  other.  Through  the  delicately  adjusted  machinery 
of  international  clearing,  these  reciprocal  relations  between 
all  the  New  York  and  all  the  London  banks  are  reduced  to 
two  units — London  and  New  York.  Either  London  owes 
New  York  or  New  York  owes  London;  and  when  we  say 
New  York  and  London  we  mean  the  two  nations.  This  dif- 
ference is  called  the  balance  of  trade,  and  it  regulates  the 
course  of  exchange  between  the  two  countries". 

Par  and  Course  of  Exchange. 

1038.  When  New  York  is  importing  heavily  there  is  a 
plethora  of  English  Exchange  in  New  York,  and  the  price  of 
exchange  in  Sterling  goes  up.  When  New  York  is  exporting 
heavily  there  is  a  plentitude  of  American  bills  in  London,  and 
Sterling  can  be  bought  in  New  York  below  par.  The  par  of 
exchange  is  $4,866,  and  when  sight  bills  drop  much  below 
$4.85  New  York  imports  the  gold  at  a  cost  of  less  than  2  cents 
per  pound  sterling.     It  is  only  when  there  is  an  actual  need 


350  CORPORATION   ACCOUNTING 

of  gold,  or  when  the  banks  on  either  side  find  it  more  profitable 
to  ship  than  to  sell  bills  too  much  below  par,  that  international 
balances  are  settled  in  gold;  and  it  is  said  that  a  profit  of  1-36 
of  one  per  cent  is  sufiicient  to  start  a  movement  in  gold  ship- 
ments. 

International  Settlements. 

1039.  When  Sterling  is  cheap  in  New  York  the  foreign 
banks  buy  heavily  so  as  to  lay  up  a  credit  in  London  against 
which  to  draw  when  their  customers  wish  to  send  money  to 
the  "old  country."  What  is  true  of  the  United  States  and 
England  is  true  of  the  United  States  and  any  other  country, 
excepting  that  instead  of  these  settlements  being  made  direct 
between  the  respective  countries  they  are  more  frequently 
made  through  London,  which  is  the  world's  clearing  house. 
For  example,  if  St.  Petersburg  owes  New  York  and  New  York 
owes  London,  instead  of  St.  Petersburg  paying  New  York  and 
New  York  paying  London,  St.  Petersburg  pays  London  for 
account  of  New  York. 

Foreign  Exchange. 

1040.  So  highly  is  this  international  exchange  business 
developed,  that  here  in  a  provincial  city  on  the  edge  of  the 
Western  Continent,  The  Farmers  National  Bank  of  Fresno,  of 
which  the  writer  is  an  officer,*  can  sell  exchange  on  hundreds 
of  cities  and  towns  in  all  parts  of  the  world,  and  these  checks 
drawn  by  it  will  be  cashed  for  their  full  face  value  at  the  points 
on  which  they  are  drawn ;  and  for  this  service  it  charges  the 
purchaser  but  a  few  cents.  In  the  same  way  it  pays  foreign 
checks  drawn  on  any  city  in  this  country. 

Letters  of  Credit. 

1041.  Issuing  foreign  and  domestic  letters  of  credit  is  an- 
other way  in  which  the  banks  serve  the  travelling  public,  by 
placing  funds  at  their  disposal  in  any  part  of  the  world  in 
which  they  may  be  travelling.  If  it  wasn't  for  these  letters  of 
credit,  with  their  system  of  identification,  the  traveller  would 
have  to  carry  gold  with  him  and  exchange  it  by  weight  for 
coin  of  the  country  in  which  he  was  travelling.  The  danger 
and  inconvenience  of  this  are  too  apparent  to  need  dwelling  on. 

Various  Functions  of  a  Bank. 

1042.  But  to  come  nearer  home,  as  the  saying  goes :  If  a 
merchant  wants  to  pay  a  bill  in  New  York  or  San  Francisco, 

*The   writer   was   a   resident  of  Fresno  at  the  time  this  was  written. 


AND   CORPORATION   LAW  351 

the  bank  sells  him  money  there  for  five  cents,  or  ten  cents  a 
hundred.  It  takes'  his  checks  on  deposit  from  all  parts  of  the 
country,  pays  out  the  money  on  them  and  attends  to  their  col- 
lection without  cost  to  its  customer.  It  collects  drafts,  notes, 
insurance  premiums,  coupons,  bonds,  etc.,  protests  commer- 
cial paper,  pays  taxes  at  distant  points,  handles  escrow  mat- 
ter, buys  and  sells  bonds  and  performs  a  hundred  and  one 
kinds  of  service,  better,  more  accurately,  and  more  promptly 
than  if  the  customer  attended  to  it  himself  at  great  expense 
and  inconvenience ;  and  for  this  service  it  charges  from  ten  or 
fifteen  cents  on  small  matters,  to  one-tenth  of  one  per  cent  on 
large  matters.  Banks  execute  commissions  and  place  their  fa- 
cilities at  the  service  of  their  customers  cheaper,  and  do  more 
accommodation  business  than  any  other  class  of  institution  in 
the  world. 

Banks  and  Progress. 

1043.  Truly  the  world  could  not  progress  without  banks. 
If  there  were  no  banks  to  discount  commercial  paper  and  ex- 
tend credit  on  collaterals,  the  world  instead  of  being  one  vast 
trading  mart,  the  most  remote  comers  of  which  are  accessible 
to  everybody,  would  be  made  up  of  numberless  local  trading 
camps,  exercising  but  limited  relations  and  exerting  but  little 
influence  outside  their  respective  localities. 

Handling  Bills  of  Lading. 

1044.  The  shipper  can  take  his  bill  of  lading  to  his  bank, 
attach  it  to  a  sight  draft  on  a  responsible  consignee,  deposit 
it  as'  he  would  a  bank  draft  and  have  the  use  of  the  money 
while  his  goods  are  in  transit  across  the  continent.  In  this 
way  the  shipper  is  enabled  to  continue  buying  and  shipping 
on  a  limited  cash  capital,  and  the  producer  is  benefitted  quite 
as  much  as  the  shipper,  for  he  gets  the  cash  the  shipper  obtains 
from  the  bank  on  his  bills  of  lading. 

Discounting  Notes  and  Acceptances. 

1045.  The  manufacturer  or  jobber  sells  goods  to  the  re- 
tailer and  takes  notes  or  acceptances  at  60  or  90  days'.  It 
would  be  quite  impossible  for  him  to  carry  all  his  customers  in 
this  way,  so  he  discounts  their  acceptances  at  his  bank,  or  puts 
them  up  as  collateral  security  for  an  extension  of  credit,  and 
through  the  agency  of  the  bank  the  manufacturer  or  jobber 
is  enabled  to  extend  credit  to  the  retailer  and  develop  his  busi- 


352  CORPORATION   ACCOUNTING 

ness.  In  this  instance  the  consumer  is  benefitted,  because  the 
retailer  could  not  give  credit  to  his  customers  if  he  did  not  get 
time  on  his  purchases. 

Crop  Mortgages. 

1046.  The  farmer  needs  money  to  seed  his  fields  or  to  har- 
vest his'  crop,  he  goes  to  his  banker,  gives  him  a  crop  mort- 
gage and  receives  the  desired  and  necessary  funds. 

Fountain  Source  of  Credit. 

1047.  Sufficient  has  been  said  to  show  that  the  bulk  of 
the  world's  business  is  done  on  credit,  and  that  the  fountain 
source  of  credit  is  the  bank.  Banks  are  essentially  credit  in- 
stitutions ;  the  buy  and  sell  credits,  they  are  trusted  and  trust- 
ing. The  depositors  place  their  funds  with  them  because  they 
have  faith  in  them,  and  the  banks  loan  these  funds  to  borrow- 
ers, because  they  have  faith  in  their  ability  to  repay  them ;  but 
the  banks  must  give  evidence  of  responsibility  before  they  are 
trusted,  and  this  leads'  us  up  to  the  formation  and  organization 
of  banks. 

Bank  Organization. 

1048.  The  chief  business  of  a  bank  is  to  make  loans,  but  it 
requires  other  than  its  own  capital  in  order  to  make  its  busi- 
ness profitable.  It  is  the  function  of  a  bank  to  gather  together 
the  scattered  and  idle  capital  in  the  hands  of  the  many,  and 
make  it  available  to  those  who  can  profitably  employ  it  in  pro- 
duction— not  merely  to  their  own  advantage  but  to  the  ad- 
vantage of  the  entire  community.  A  number  of  men  have 
money,  but  they  have  not  the  opportunity  to  invest  it,  or  the 
amount  is  too  small  for  profitable  investment ;  other  men  have 
the  opportunity,  but  lack  the  funds.  The  latter  represents 
demand,  the  former  supply.  Supply  without  demand  means 
inaction,  stagnation.  Demand  without  supply  means  famine, 
starvation.  Demand  supplied  means  activity,  health,  progress, 
prosperity;  and  the  banker  is  the  medium  through  which  de- 
mand and  supply  are  joined  in  an  active  working  partnership, 
and  production  and  trade  promoted,  stimulated,  multiplied; 
hence  it  is  that  the  first  business  of  a  bank  is  to  receive  deposits 
and  increase  its  loan  funds,  so  as  to  have  sufficient  funds  avail- 
able for  lending,  and  at  the  same  time  maintain  a  proper  re- 
serve of  capital  for  the  protection  of  its  depositors ;  but  it  must 
give  evidence  of  strength,  stability  and  responsibility  before 
it  can  expect  to  be  entrusted  with  the  funds  of  others.     In 


AND   CORPORATION   LAW  353 

other  words,  it  must  have  sufficient  capital  of  its  own,  and  its 
business  be  so  regulated  by  law,  and  managed  by  men  of 
known  ability  and  responsibility,  as  to  inspire  public  confi- 
dence in  it. 

Incorporating  a  National  Bank. 

1049.  I"^  order  to  acquire  this  capital  and  come  under  these 
laws  it  incorporates.  To  incorporate  under  the  National  Bank 
Act  it  is  necessary  that  at  least  five  persons  (contemplative 
stockholders)  sign  an  application  to  the  Comptroller  of  the 
Currency  for  a  charter,  giving  the  title,  location,  and  proposed 
capital  of  the  prospective  bank.  They  must  also  furnish  a 
statement  of  the  business  and  financial  standing  of  said  ap- 
plicants, and  have  the  endorsement  of  a  United  States  Senator, 
Representative,  Judge  of  Court  or  other  prominent  official  as 
to  the  character  and  financial  responsibility  of  the  applicants. 

Minimum  Capital. 

1050.  The  minimum  capital  required  for  organization  is 
$25,000  in  towns  of  3000  population ;  $50,000  in  towns  of  6000 ; 
$100,000  in  cities  of  50,000  and  $200,000  in  all  other  cities. 

Payment  of  Capital. 

105 1.  At  least  fifty  per  cent  of  the  capital  must  be  paid  in 
before  a  National  Bank  shall  be  authorized  to  commence  busi- 
ness, and  the  remainder  of  the  capital  must  be  paid  at  least  in 
instalments  of  ten  per  cent  on  the  whole  capital  at  the  end  of 
each  month  succeeding  the  month  in  which  it  was  authorize'd 
to  commence  business. 

Liability  of  Stockholders. 

1052.  National  Banks  are  what  is  known  as  ''double  lia- 
bility corporations;"  that  is,  each  and  every  stockholder  is  re- 
quired not  only  to  pay  the  full  face  value  of  his  subscription, 
but  he  is  liable  in  case  of  failure  for  just  as"  much  more;  this 
gives  to  the  depositors  a  larger  measure  of  protection  than 
that  given  to  the  creditors  of  any  other  class  of  corporation. 
If  a  bank  with  $1,000,000  paid-up  capital  goes  into  liquidation, 
and  its  entire  resources  are  insufficient  to  liquidate  its  liabili- 
ties, the  stockholders  can  be  called  upon  to  pay  in  another 
million  dollars  if  such  a  sum  be  necessary;  and  this  liability 
is  imposed  upon  the  transferrees  of  stock  as  well  as  on  original 
subscribers. 


354  CORPORATION   ACCOUNTING 

Reserve  Requirements. 

1053.  Every  National  Bank  must  keep  in  its  vaults,  or  in 
the  hands  of  approved  reserve  agents,  a  certain  percentage  of 
its  deposits,  both  general  and  bank  deposits ;  i.  e.,  in  the  Cen- 
tral Reserve  cities,  of  which  there  are  only  three,  a  cash  re- 
serve of  25%  of  all  deposits  must  be  kept  in  the  vaults  of  the 
bank  at  all  times.  In  the  reserve  cities,  of  which  there  are 
about  22,  a  reserve  of  25%  must  be  maintained  on  all  deposits, 
but  it  is  allowed  to  keep  50%  of  this  reserve  in  Central  Re- 
serve Banks  approved  by  the  Comptroller  of  the  Currency. 
Outside  of  the  reserve  cities,  all  national  banks'  are  required 
to  maintain  a  reserve  of  15%,  two-fifths  of  which  must  be  kept 
in  cash  in  the  banks'  vaults  and  the  remaining  three-fifths  may 
be  kept  in  the  hands  of  approved  reserve  agents. 

Computing  Reserve. 

1054.  Reserve  must  be  maintained  and  computed  on  gen- 
eral deposits  and  bank  deposits.  General  deposits  include  those 
subject  to  check,  demand  and  interest  bearing  certificates,  cer- 
tified checks,  dividends,  overdrafts,  U.  S.  deposits  and  deposits 
of  U.  S.  disbursing  officers.  The  reason  for  including  certified 
checks  is  that  although  they  reduce  the  balance  of  the  depos- 
itors ledger  the  amount  they  represent  is  still  on  deposit,  and 
the  bank  in  certifying  those  checks  has  specifically  obligated 
itself  to  pay  them. 

1055.  Overdrafts  are  included,  that  is,  added  to  the  net 
balance  of  the  depositors  ledger,  because  being  debits  they  re- 
duce the  gross  deposits,  and  it  is  the  gross  amount  the  bank 
owes  its  depositors — not  the  difference  between  that  and  what 
the  depositors  owe  the  bank — that  must  enter  into  the  calcu- 
lation. 

1056.  Bank  deposits  include  all  amounts  due  to  State, 
National  and  other  banks,  after  the  balance  due  from  such 
banks  is  deducted.  If  the  reciprocal  accounts  with  banks 
show  a  net  balance  due  to  banks,  it  must  be  included  in  the 
deposits  requiring  reserve;  but  if  these  reciprocal  accounts 
show  a  net  balance  due  from  banks,  it  must  be  omitted  alto- 
gether in  figuring  reserve.  This  excess  cannot  be  used  to  de- 
crease liability  for  general  deposits.  Balances  due  from  banks' 
can  be  used  only  to  ofifset  balances  due  to  banks,  except  in 
the  case  of  "reserve  banks,"  and  then  any  excess  in  the  hands 
of  reserve  banks  over  the  one-half  or  three-fifths  reserve  al- 
lowed, does  not  count  as  reserve,  but  this  excess  may  be  used 
to  reduce  bank  deposits  when  the  reciprocal  accounts  with 
banks  show  more  due  to,  than  due  from  banks. 


$ 


Form  for  Computing  the  Lawful  Money  Reserve  of  National  Banks  not  in  Reserve  Cities, 
Items  on  Which  Reserve  is  Required. 

General  Deposits. 

Individual  deposits,  viz.: 

Deposits  subject  to  check, — Demand  and  Time 
ctfs.,  Cashiers  cks..  Certified  cks.,  &c.     .    .    . 

Dividends  unpaid 

United  States  Deposits 

Deposits  of  U.  S.  Disbursing  Officers     .    .    .    ... 

Less  Deductions  Allowed, 

Exchanges  for  Clearing  House    .    .    .    .    .    .    .    . 

Checks  on  other  banks  in  same  place 

National  Bank  Notes  (other  than  own  issue)  .    .    . 

Net  General' Deposits •.    .    . 

Bank  Deposits. 

Due  to  National  Banks 

Due  to  State  Banks  and  Bankers 

Less. 

Due  from  National  Banks 

Due  from  State  Banks  and  Bankers    ...... 


$ 

$ 


$.... 


*Net  Bank  Deposits  (Net  balance  due  banks  if  any) 

[If  net  balance  is  due  from  banks,  then  there  are  no  bank  deposits  requiring  reserve, 
and  as  such  balance  cannot  offset  any  other  deposits,  omit  it  entirely.] 

The  sum  is  the  total  Deposits  on  which  reserve  is  required,  viz 

Deduct  6|-  times  the  five  per  cent.  {S%)  fund  (i.  e,  the  amount  of  deposits 

covered  by  this  fund  as  reserve) 

^  Net  Deposits  requiring  reserve  is .....,,.. 

15%  of  this  is  the  total  Reserve  required,  viz.  I  $ 

Proportion  of  Reserve  to  be  in  bank  is  |th,  viz.  |  $ ;„., 

Any  e;$cess  with  Reserve  Agents  above  the  proportion  allowed  to  be  with  them  as 
Reserve,  can  be  counted  as  dw6/rom  banks,  so  if  the  Home  Reserve  is  short,  and 
there  is  a  balance  due  banks,  the  excess  with  Agents  can  be  used  to  lessen  Reserve 
required.    The  following  are  short  methods  of  applying  it. 

Rule  C. — If  the  excess  is  evidently  considerably  less  than  the  net  bal- 
ance due  banks,  subtract  from  the  net  deposits^  *  the  entire  net  balance  with 

Reserve  Agents,  ^  viz i 

■g^jSt  or,  unless  exact  amount  is  needed,  approximately  say  -^^  of  the  remainder 

is  the  Home  Reserve  required,  viz. 

Rule  D. — If  the  excess  is  apparently  near  the  amount  of  net.  balance 

due  banks,'  from  the  net  balance  due  from  Reserve  Agents,  ^  viz 

Subtract  9%  of  the  net  deposits  requiring  Reserve.^  viz 


%.... 


$ 

$.^ 

$ 

$^ 

$ 


Increase  the  remainder  by  yf  ^  or  say  -j*^  of  it    ......    . 

The  .total  is  the  exact  excess  that  can  be  applied,  viz 

and  is  applied  as  follows  : 

If  this  excess  equals  or  is  less  than  the  net  balance  due  banks,2  si<  per  cent,  of  it  can  be  applied 
to  reduce  Home  deficiency,  but  if  the  excess  is  larger  than  the  net  balance  due  banks,2  only  an 
amount  of  the  excess  equal  to  six  per  cent,  of  said  net  balance  can  be  so  applied. 

Items  Composing  the  Net  Reserve  and  Distribution  of  the  Same. 


Three-fifths  of  the  Net  Reserve  required  is 
items  making  up  the  same  may  consist 
of*  Net  Balances  with  approved  Re- 
serve Agents,' viz : 


3Total  net  balance 

t  Excess  with  Reserve  Agents  . 
Deficiency  with  Rtserve  Agents 


Two  fifths  of  the  Net  Reserve  required  is 
Items  in  Bank's  possession  to  make  up 
the  same,  viz  : 


Gold  Coin 

Gold  Treasury  Certificates    .   . 
C.H.  Certificates  for  Coin  or  Legal  Tenders 

Silver  Dollars   - 

Silver  Treasury  Certificates  .  . 

Fractional  Silver . 

Legal-Tender  Notes    ..... 

U.  S.  Certificates   of   Deposit 

for  Legal  Tenders 


Excess  in  items  held  by  the  Bank 
Deficiency  in  items  held  by  the  Bank 


Excess  in  the  entire  Reserve  held,  $ •       Deficiency  in  the  entire  Reserve  held,  $ 

*If  reciprocal  accounts  are  kept  with  reserve  agents,  only  the  nei  amount  due  from  such  agents  is 
available  for  reserve. 

t  Any  excess  with  reserve  agents  can  not  be  counted  as  reserve,  and  is  available  only  to  reduce  or 
cancel  net  balance  due  to  banks  and  bankers. 


356  CORPORATION   ACCOUNTING 

Exchanges  for  Clearing  House. 

1058.  We  observe  that  from  the  total  deposits,  exchanges 
for  the  Clearing  House  and  checks  on  other  banks  in  the  same 
place  are  deducted.  The  reason  is  this :  All  the  banks  in  the 
United  States  are  called  on  for  a  Statement  of  Condition  on 
the  same  day.  These  calls  come  unexpectedly  five  times  a 
year,  are  made  by  telegram,  and  are  required  for  a  day  already 
passed.  At  the  time  the  call  is  made  every  bank  has  checks 
on  other  banks,  but  if  they  could  be  instantly  cleared  there 
would  be  none  outsanding;  they  v^ould  all  be  charged  up  to 
depositors,  and  consequently  the  aggregate  deposits  would  be 
reduced  by  the  aggregate  amount  of  these  checks.  The  same 
reason  applies  for  deducting  the  notes  of  other  National  Banks. 
Every  bank  has  notes  of  other  banks,  and  in  the  aggregate 
they  become  a  neutral  quantity. 

5%  Remeption  Fund. 

1059.  The  object  of  deducting  6  2-3  times  the  5%  fund  is, 
the  5%  fund  in  the  hands  of  the  U.  S.  Treasurer  is  allowed 
to  count  as  reserve,  and  as  every  fifteen  cents  constitutes  a 
reserve  against  a  dollar,  and  as  6  2-3  times  15  cents  is  equal 
to  a  dollar,  it  follows  that  the  5%  fund  forms  a  reserve  against 
6  2-3  times  its  amount,  therefore  this  amount  is  deducted  from 
deposits  to  ascertain  the  amount  on  which  reserve  must  yet 
be  calculated. 

The  form  for  computing  reserve,  given  on  the  preceding 
page  is  taken  from  Pratt's  Digest  of  National  Banking 
Laws. 

N.  B.  The  author  is  indebted  to  Messrs.  Pratt  &  Sons, 
Washington,  D.  C,  for  their  courtesy  in  allowing  him  to  use 
this  and  the  following  tables. 


AND    CORPORATION   LAW 


357 


Rules  for  Figuring  Reserve. 

1060.  Rule  for  figuring  reserve  when  the  home  reserve  is- 
close,  and  there  is  an  excess  over  the  permitted  three-fifths- 
with  reserve  banks,  and  when  the  balance  due  to  banks  is 
greater  by  the  amount  of  this  excess  than  the  balance  due 
from  banks — (Pratts  Digest.) 

EXAMPLE  3- 
Illustrating  Rule  <5,  page  262, 


Individual  Deposits 

Dividends  Unpaid       .   .   *   .   . 

U.  S.  Deposits 

Dep.  U.  S.  Disbursing  Officers 

Less — 
Exchange  for  Clearing  House, 
Checks  on  local  Banks  .   . 

Other  National  Bank  Notes  .   . 


Due  to  Banks   .   . 
Due  from  Banks  . 
Total  Deposits 


1360 

000 

150 

10 

000 

3000 

- 

500 

— 

80 

000 

10 

000 

Less  6^  times  5%  fund  (2250) 


Total  net  Deposits     .   ,  •  • 
Subtract — 
Net  balance  with  Reserve  Agents 


•g\st  or  say  y^th  of  this  remainder 

Is  the  |th' Home  Reserve  required — viz: 

Total  of  items  (cash,  etc.)  in  Bank  to  count  as  Reserve 


360 


15 


344 
70 


414 
15 


399 

45 


354 
23 
23 


150 


500 


650 


650 
000 


650 


000 


650 

643 
746 


103 


Approximate  Excess     .*..,. 

(Or  by  taking  exactly  -g^st  of  the  $354650,  gives  the  Exact 

Excess^— viz:  $363.) 
Three-fifths  added  to  the  above  two-fifths  gives  the  total  minimum  Reserve 
necessary  to  have,  three-fifths  of  which  may  be  with  Reserve  Agents. 


;358 


CORPORATION   ACCOUNTING 


1062.  Rule  for  figuring  reserve  when  the  home  reserve  is 
close,  and  there  is  an  excess  over  three-fifths  with  reserve 
agents,  and  it  does  not  appear  that  this  excess  added  to  amount 
due  from  banks  will  exceed  amount  due  to  banks.  (Pratt's 
Digest.) 

EXAMPLE  4- 
Illustrating  Rule  7,  page  262. 


Individual  Deposits      - 

Dividends  Unpaid 

U.  S.  Deposits 

Department  U.  S.  Disbursing  Officers 

Less — 

Exchanges  for  Clearing  House     .    . 

Checks  on  Local  Banks, 

Other  National  Bank  Notes     ,   .    . 


$244'ooo 
430 


Due  to  Banks     . 
Due  from  Banks 


000 
21500 

I  koo 


52'ooo 

28;000 


244 


430 


000 


Total  Deposits      

Deduct  6^  times  5%  fund  ($2,250) 


Total  net  Deposits 


232 


24 


256 
15 


241 


430 


430 
000 

430 


15%  of  this  is  the  total  Reserve  required— viz :  ........ 

Amount  required  at  home  6%  (fths  of  15%)  .   .   ^ 

If  amount  of  Home  Reserve  by  this  estimate  Is  short,  and  con- 
ditions admit,  the  Excess  with  Reserve  Agents  may  be  applied. 


Total  of  items  (cash,  etc.)  in  Bank  to  Count  as  Reserve 
Short  on  first  estimate     .   .   ^ 


Net  balance — 

With  Reserve  Agents •   •   • 

Amount  with  Reserve  Agents  allowed  to 
Count  as  Reserve  9% 

The  remainder  is  -^^^  of  Exact  Excess    . 

[Add  yf  ^  or  say  j^h  of  this.     For  Exact 

Excess  jf  5th] 

Approximate  total  Excess »  . 

6%  (i.  e.  I  of  15%)  of  this,  is  amount  that  can  be  applied  on  Home 
Reserve     .  » 

-Making  Homei  Reserve  in  Excess  of  requirements 


14 


214 
485 


257 


42 

21 

000 
728 

20 

2 

272 
027 

22 

299 

228 


^337 
•I  109 


AND   CORPORATION   LAW 


359* 


Daily  Reserve  Statement. 

1064.  It  is  customary  in  all  the  large  banks  to  figure  the 
reserve  every  day,  and  when  a  statement  is  called  for  it  is  only 
necessary  to  average  it  for  the  thirty  days  preceding  the  call.. 
A  National  Bank  may  be  put  into  the  hands  of  a  receiver  for 
failure  to  maintain  its  percentage  of  lawful  reserve. 

Further  Restrictions. 

1065.  A  National  Bank  may  not  loan  money  on  its  own 
stock.  One-tenth  of  the  net  profits  of  every  six  months'  must 
be  added  to  surplus  until  the  surplus  shall  have  reached  20% 
of  the  capital.  It  may  not  loan  more  than  an  equivalent  of 
10%  of  its  Capital  Stock  to  any  one  individual,  firm  or  corpora- 
tion. This  latter  provision,  as  it  now  stands,  works  a  hard- 
ship on  all  banks  with  a  large  surplus,  and  an  effort  is  being- 
made  to  have  it  amended  so  that  banks  may  loan  10%  of  their 
working  capital;  that  is  their  capital,  surplus  and  undivided 
profits  combined. 

1066.  Discounting  bills  of  exchange  in  good  faith  against 
actually  existing  values,  and  the  discount  of  commercial  paper 
actually  owned  by  those  negotiating  the  same,  are  not  regarded 
as  loans'. 

1067.  National  Banks  may  not  loan  money  on  Real  Es- 
tate mortgages.  The  reason  is  that  all  its  assets  are  supposed 
to  be  "quick  assets,"  and  money  can  not  be  realized  quickly 
on  real  estate. 


1068.            LOAN  LEDGER- 

-SPECIAL  DESIGN. 

Name,     John  H.  Brown 
Rating 

Business 

Maximum  Credit  $ , 

Date 

Endorsed  by 

0 

Direct  Liability     j 

Endors'd  for 

Indirect  Liability 

Total 

Rt. 

Tm 

Dr. 

Cr. 

Bal 

Rt 

Tm 

Dr. 

Or. 

Bal 

Nov.    1 

A 

7 

Id 

1000 

1000 

John  Brown 

8 

Id 

500 

500 

1500 

10 

John  Smith 

B 

7 

Id 

1500 

?.m 

3000 

10 

500 

2500 

N.  B.  The  classification  *'A"  and  "B"  represent  secured 
and  unsecured  loans.  There  should  also  be  a  "checking"  col- 
umn after  each  debit  column,  to  check  off  notes  paid.  A 
"number"  column  should  also  follow  the  date. 

1069.  The  following  four  pages  illustrate  the  form  of  Re- 
port required  to  be  made  under  oath  by  every  National  Bank 
five  times  a  year. 


360 


CORPORATION  ACCOUNTING 


Form  of  Report  Required  by 

No.  of  Bank, . 

Report  of  the  condition  of  *'  The ,"  at ,  in  the  State 

Dr. 


Resources. 


Dollars    Cents 


8. 

9- 

lO. 

II. 

12. 

13. 

14. 

15. 
16. 

17. 


18. 


19. 


Loans  and  discounts  on  which  officers  and  direct- 
ors are  liable  (see  schedule)   . % 

Loans  and  discounts  on  which  officers  and  directors 

*   are  not  liable % 

Overdrafts,  secured,  | ,  unsecured,  $ ,  (see  schedule) 

United  States  bonds  to  secure  circulation  (par  value),  -4 — 

percents, percents 

United  States  bonds  to  secure  United  States  deposits  (par 

value), percents 

United  States  bonds  on  hand  (par  value), percents  .   . 

Premium  on  bonds  for  circulation,  % ;    premium  on 

other  United  States  bonds,  $ 

Stocks,  securities,  etc.,  including  premium  on  same  (see 

Schedule) .   .   . 

Banking  house  $ ;  furniture  and  fixtures  % .... 

Other  real  estate  and  mortgages  owned  (see  schedule)  .   . 
Due  from  National  banks  (not  approved  reserve  agents)  . 

Due  from  State  and  private  banks  and  bankers 

Due  from  approved  reserve  agents  (see  schedule)    .... 

Checks  and  other  cash  items  (see  schedule) 

Exchanges  for  Clearing-house ' 

Bills  of  other  National  banks . 

Fractional  paper  currency,  nickels,  and  cents 

Lawful  money  reserve  in  bank,  viz. : 

Gold  coin 

Gold  Treasury  certificates    .   . 

Gold  clearing-house  certificates 

Silver  dollars 

Silver  Treasury  certificates 

Fractional  silver  coin  .  .  . 


Specie,  viz.: 


.   .  $. 


Total  Specie $ 

Legal-tender  notes $ 

United  States  certificates  of  deposit  (see  section 
5193,  Revised  statutes)  , $ 


Redemption  fund  with  United  States  Treasurer  (not  more 

than  5  per  cent,  on  circulation) 

Due  from  United  States  Treasurer 


Total 


I, 


of  ♦'  The 


do  solemnly  swear  that  the  above  state- 


ment is  true,  and  that  the  schedules  on  back  of  the  report  fully  and  correctly 
represent  the  true  state  of  the  several  matters  therein  contained,  to  the  best 

of  my  knowledge  and  belief.  ,  Cashier, 

Correct.    Attest : 


[SEAI,.] 

State  of 


County  of 


Sworn  to  and  subscribed  before  me  this day  of  ■ 


-,  !■  Directors. 

189-. 


AND    CORPORATION   LAW 


361 


ihe  Comptroller  of  the  Currency, 
of ,  at  the  close  of  business  on  the 


day  of- 


■*i8q-^ 


Cr. 


s. 

6. 

7. 

8. 

9. 
lo. 
II. 

12. 

13. 
14. 

15. 
16. 
17. 

18. 

19. 


Liabilities. 


Capital  stock  paid  in   .   . 

Surplus  fund 

Undivided  profits ......$ 

Less  current  expenses  and  taxes  paid $ 

Circulating  notes  received  from  Comptroller. .  .   ,  $ 
Less  amount  on  hand  and  in  Treasury  for  re- 
demption or  in  transit $ 


State  bank  circulation  outstanding 

Due  to  National  banks  (not  approved  reserve  agents) 
Due  to  State  and  private  banks  and  bankers  .... 
Due  to  approved  reserve  agents  (see  schedule)     .   . 

Dividends  unpaid 

Individual  deposits  subject  to  check $  . 

Demand  certificates  of  deposit $  . 

Time  certificates  of  deposit .   . $. 

Certified  checks $  • 

Cashier's  checks  outstanding $  . 


United  States  deposits 

Deposits  of  United  States  disbursing  ofiicers 

Notes  and  bills  rediscounted 

Bills  payable,  including  certificates  of  deposit  representing 

money  borrowed 

Liabilities  other  than  those  above  stated    . .  .  • 


Total 


Dollars. 


Cents. 


Note  i. — This  report  is  to  be  made  at  such  times  as  may  be  designated  by 
the  Comptroller  of  the  Currency;  to  be  sworn  to  by  the  president  or  cashier, 
not  by  any  other  officer;  attested  by  not  less  than  three  directors,  and  for- 
warded to  the  Comptroller  of  the  Currency  without  delay.  Each  day's  delay, 
after  five  days,  will  subject  the  bank  to  a  penalty  of  one  hundred  dollars. 
See  Sections  521 1  and  5213,  Revised  Statutes  of  the  United  States. 

Note  2.-TBe  careful  to  make  full  entries— writing  No,  after  any  item,  for 
which  there  is  no  amount  to  enter. 


362 


CORPORATION  ACCOUNTING 


SCHEDULES. 

Fill  all  schedules,  writing  in  the  word  "none"  wherever  no  amount  is  to  be 

entered. 

Loans  and  discounts.     {Including  loans  and  discounts  on  which  officers  and 

directors  are  liable.^ 


On  demand  paper  with  one  or  more  individual  or  firm  names  $ 
On  demand,  secured  by  stocks,  bonds  and  other  personal 

securities % 

On  time,  paper  with  two  or  more  individual  or  firm  names  .  $ 
On  time,  single-name  paper  (one  person  or  firm)  without 

other  security % 

On  time,  secured  by  stocks,  bonds,  and  other  personal  se- 
curities   •   •   • % 

On  time,  on  mortgages  or  other  real-estate  security  (see 
schedule) • % 


Total 


% 


Included  in  the  above  are — 

Bad  debts,  as  defined  in  sec.  5204  R.  S.,    %  »  . 

Other  suspended  and  overdue  paper    .    .  $  .  . 

Liab's  of  direc's(indi' land  firm)  as  payers  $.  . 


} 


Enter  amount  in 
each  of  these  three 
items,  or  write  in 
word  "none"  if  no 
amount  to  enter. 


Loans  exceeding  the  limit  prescribed  by  section  5200  of  the  Revised  Statute s^ 
including  a^nounts  which  exceed  this  limit  due  from.  State  and  private 
banks  and  bankers. 


Name  of  borrower. 


Enter  full 
amount  of  loan. 


Name  of  borrower. 


Enter  full 
amount  of  loan. 


Overdrafts. 


Secured : 
Standing  twelve  months    or 

over 

Standing  six  months  or  over 
Standing  three  months  or  over 

Temporary 

Officers  and  directors     .   .  . 


Unsecured : 
Standing  twelve    months   or 

over 

Standing  six  months  or  over 
Standing  three  months  or  over 

Temporary 

Officers  and  directors    .... 


StockSj  Securities  J  etc.,  {Stocks  y  Bonds  ^  Claims,  Judgments,  and  similar  items- 
should  be.  included  under  this  head.) 


Enter  number 
shares  of  stock 
or  face  value 
of  bonds. 


Name  of  corporation 

issuing  stock, 

bonds,  etc. 


Amount  at 

which  carried 

on  books. 


Estimated 

actual  market 

value. 


State  whether  taken 
for  *  debts  previously 
contracted  "  or  other- 


From- 


AND   CORPORATION   LAW 

Balances  due  from  or  to  approved  reserve  agents. 
To— 


363 


Enter  nain*!  arid  location  of  bank. 


Amount. 


Enter  name  and  location  of  bank.     |   Amount. 


Checks  and  other  cash  items. 


Checks  and  drafts  on  banks, 
etc.,  in  this  city 

Checks  and  drafts  on  other 
banks     


Average  reserve  and  interest. 

Average  reserve  for  last  thirty  days  (in  bank  or  with  reserve  agents)  was 

per  cent,  of  deposits  and  bank  balances.    The  highest  rate  of  interest 

paid  by  the  bank  on  deposits  is per  cent.,  on  bills  payable  is percent., 

on  notes  and  bills  rediscounted  is per  cent. 


Other  Real  Estate  and  Mortgages  Owned. 


•  Describe  property, 
state  form  of  con- 
veyance, and  from 
whom  obtained. 


Amount  at 

which 
carried  on 

books. 


Amount  of 
prior  lien 
on  prop-    ' 

erty,  if  any. 


Estimated 

actual 

value  of 

property. 


Date  when 
acquired. 


State  whether  ta- 
ken for  "  debts  pre* 
viously  contracted," 
or  otherwise. 


Loans  and  Discounts ^  Secured  by  Mortgages  or  other  Real  Estate  Seczirity, 


Describe  property, 
state  form  of  convey- 
ance, and  from  whom 
obtained. 


Amount  at 
which 

carried  on 
books. 


Amount  of 
.prior  lien 
on  prop- 
erty, if  any. 


Estimated 
actual 
value  of 

property. 


Date  when, 
acquired. 


State  whether  ta- 
ken for-"  debts  pre- 
viously contracted," 
or  otherwise. 


Certificates  of  Deposit  represefiting  money  borrowed. 


To  whom  issued 


Amount. 


Demand. 


Time. 


Rate  of 
Interest. 


Liabilities  of  Officers  and  Directors, 


Names     of     Officers 
and  Directors. 


X.iability  (individual 
or  firm)  as  payors. 


Liability  (individual 
or  firm)  as  indorsers 
or  guarantors. 


Overdrafts. 


No.  Shares 
Stock 
Owned, 


364 


CORPORATION"   ACCOUNTING 


1074.     In  addition  to  the  foregoing  statement  the  following 
statement  of  earnings  and  dividends  is  also  furnished  under 
oath  twice  a  year. 
Jih.  of  Bankf No.  of  Div 

Report  of  Earnings  and  Dividends  of 

*^The ,  '  located  at ,  in  the 

State  of. for  the  period  of Jiionths  endingyiSg    , 

Declared. j8g     .     Payable j8g 


Dr. 

Cr. 

3.  Premiums  on  bonds  charged 

f 

off  since  last  report  (if 

I.  Gross  earnings  since  last 

any)      

report ' 

'.,.••• 

4.  Losses    sustained   through 

bad    debts,   decrease    of 

values,  etc.,  since  last  re- 

2. Other  profits  realized  since 

port  

last  report 



... 

5.  Expenses  and  taxes  paid 

since  last  report   .... 

6.  Net  earnings  and  profits  or 

loss  of  past  six  months 

carried  down 



Total 

Total 

9.  Carried  to  surplus  fund  (not 



— 

*6,  Net  earnings  and  profits  or 



— 

less  than  one-tenth  of  item 

loss  of  past  six  months 

6,  unless  surplus   is  al- 

brought down 

ready   20    per    cent,   of 

7.  Undivided  profits  or  loss 

capital) , . 

brought  forward  from  last 

10.  Dividend  of. per  cent. 

report    (item  11  of  that 

(on  capital  ^ )  .    . 

report)  ......... 

II.  Amount  of  net  profits  un- 

divided or  loss  to  be  car- 

12. Amount   withdrawn   from 

ried  forward 

surplus  (if  any)  .... 

... 

Total 

Total 

,'-  . 

— 

— 

15.  Total  surplus  fund  proper 

at  date  of  this  report  .    . 

16.  Total  dividends   since   or- 

ganization as  Nat'l  Bank 

17.  Total  other  profits  on  hand 

(same  as  item  il  of  this 
report) 

Total 


13.  Total   profits  as  National 

Bank  since  organization 
(less  expenses,  premiums, 
losses,  etc.) 

14,  Add  profits  of  old  organiza- 

tion at  date  of  conversion 
to  the  national  system    . 


Total 


State  of- 


-.} 


County  of- 

Sworn  to  and  subscribed  before -me  this- 


•day  of- 


189 — 


I, 


■,  Cashier  of  the  above  named  bank,  do  solemly  swear 


that  the  above  statement  is  true  to  the  best  of  my  knowledge  and  belief. 

,  Cashier, 

« la  case  the  loss  exceeds  the  profits  for  the  six  months,  amount  should  be  entered  in  red  ink. 


AND    CORPORATION   LAW  365 

Bank  Examinations. 

1076.  A  National  Bank  Examiner  visits  every  National 
Bank  twice  a  year ;  he  comes  without  warning,  and  makes  an 
exhaustive  examination  of  the  banks  resources  and  liabilities. 
He  first  counts  the  cash,  then  lists  and  classifies  the  loans  and 
discounts,  examines  collaterals,  bonds  and  securities,  sees  that 
all  notes  are  signed,  that  none  are  past  due,  that  interest  is 
paid  up,  that  no  loans  exceed  the  prescribed  limit.  He  looks 
into  the  liability  of  officers  and  directors  on  loans  and  over- 
drafts, if  any  exist.  He  verifies  by  the  books  the  last  statement 
made  to  the  Comptroller,  and  also  the  statement  of  earnings 
and  dividends.  He  audits  the  last  statement  received  from 
every  other  bank,  and  reconciles'  it  with  the  books.  He  pays 
particular  attention  to  "certified  checks"  account  to  see  that' 
there  were  funds  against  every  check  certified.  He  requests 
the  cashier  to  have  the  following  list  prepared  for  him: 

1077.  Office  of  the  National  Bank  Examiner. 

To  the  Cashier: 

Please  have  the  following  lists  prepared,  as  at  the  close  of 
business  of 

1.  List  of  overdrafts,  name  and  amount.  State  all  that 
are  secured  and  all  that  are  six  months  outstanding. 

2.  List  of  certificates  of  deposit,  number  and  amount,  with 
rate  of  interest  paid,  if  any. 

3.  List  of  Cashier's  checks,  number  and  amount. 

4.  List  of  certified  checks,  name,  date  and  amount. 

5.  List  of  collections  or  items  in  transit,  name,  date  of 
letter  and  where  sent.  Please  hold  out  all  return  advices  until 
I  have  checked  the  account. 

6.  List  of  balances  due  to  and  from  banks',  with  rate  of  in- 
terest paid  or  received. 

7.  List  of  bills  payable,  rediscounts,  certificates  of  deposit 
issued  for  borrowed  money,  or  any  other  obigations  upon 
which  the  bank  is  liable. 

8.  List  of  balances  due  to  state,  county  or  municipal  offi- 
cers, either  on  open  account  or  certificate  of  deposit,  with  rate 
of  interest  paid,  if  any.  Also  state  if  the  bank  is  liable,  directly 
or  indirectly,  upon  the  bonds  of  any  public  officer. 

9.  List  of  officers  and  employees,  with  the  respective  po- 
sitions and  salaries ;  with  the  amount  of  official  bond  of  each, 
and  state  whether  the  bonds  are  personal  or  made  by  surety 
company.    If  the  latter,  give  name  of  company. 

10.  List  of  shareholders,  name  and  number  of  shares  held 
by  each. 


366  CORPOKATION   ACCOUNTING 

11.  Copy  of  profit  and  loss  for  one  year. 

12.  Average  reserve  for  thirty  days. 

If  any  of  the  information  called  for  above  does  not  apply 
to  your  bank,  please  indicate  it  by  the  word  "none"  and  return 
this  sheet  with  the  remaining  schedules  when  completed. 
Yours  respectfully, 

JOHN  W.  WILSON, 

Examiner. 

Accounts  Verified  by  Correspondence. 

1078.  On  receipt  of  these  lists  he  proceeds  to  verify  them. 
All  collection  items  in  transit,  all  balances  due  to  and  from 
banks,  and  balances  due  to  state,  county  and  municipal  officers 
are  verified  by  correspondence.  Large  loans  are  also  verified 
by  correspondence,  and  when  he  gets  every  account  and  item 
verified,  he  makes  a  complete  report  to  the  Comptroller.  If 
he  finds  anything  irregular  in  reports  previously  sent  to  the 
Comptroller  he  requires  a  full  explanation  of  it,  and  he  advises 
the  Comptroller  whether  the  explanation  is  satisfactory.  It 
will  be  seen  that  these  examinations  are  not  perfunctory,  but 
searching  and  rigorous,  conducted  by  men  familiar  with  the 
law  and  skilled  in  accounting  and  financial  matters. 

Bonds  and  Currency. 

1079.  Banks  with  a  capital  of  $150,000  and  less  are  re- 
quired to  purchase  and  deposit  with  the  U.  S.  Treasurer  bonds 
equal  to  one-fourth  of  their  capital  stock.  All  other  banks 
must  deposit  at  least  $50,000  in  bonds.  The  deposit  of  bonds 
is  mandatory.  The  issue  of  circulation  is  optional.  All  Na- 
tional Banks  are  entitled  to  issue  circulating  notes  to  the 
amount  of  the  par  of  the  bonds  deposited,  but  in  no  case  must 
they  issue  circulation  in  excess  of  their  capital  stock.  These 
bonds  are  held  by  the  government  to  secure  the  circulation 
and  guarantee  its  redemption.  This  makes  national  currency 
(National  Bank  Notes)  as  stable  as  the  government  itself. 

Redemption  Fund. 

1080.  In  addition  to  this  deposit  of  bonds,  every  National 
Bank  is  required  to  deposit  at  least  5%  of  its  circulation  in  the 
United  States'  Treasury.  This  is  called  the  5%  Redemption 
Fund,  and  is  used  to  redeem  the  currency  of  each  bank  as  it 
comes  into  the  Treasury.  Immediately  on  a  portion  of  any 
bank's  currency  being  redeemed,  it  is  asked  to  make  good  this 
amount  at  once,  so  as  to  maintain  its  5%  Fund.  The  redeemed 


AND   CORPORATION   LAW  367 

notes  fit  to  circulate  are  returned  to  the  issuing  bank,  and  all 
unfit  are  mutilated  or  destroyed,  and  new  circulation  sent  as 
soon  as'  it  can  be  printed.     From  this  it  may  be  seen  that  a 
bank  has  at  no  time  the  use  of  more  than  95%  of  its  circula-. 
tion,  and  rarely  that  much. 

Tax  on  Circulation. 

1081.  ''Section  13  of  the  Act  of  March  14,  1900,  imposed 
a  tax  of  one-fourth  of  one  per  cent  each  half  year,  or  one-half 
of  one  per  cent  a  year  on  the  2%  consols;  and  1%  on  the  3% 
and  4%  bonds.  This'  makes  the  2%  consols  the  best  on 
which  to  base  circulation,  and  they  are  the  most  generally 
used.  The  following  table,  being  one  of  a  series  of  tables  pre- 
pared by  Mr.  Joseph  McCoy,  Actuary  of  the  United  States 
Treasury  Department,  for  the  National  City  Bank  of  New 
York,  will  give  a  good  idea  of  the  profits  of  circulation.  In 
this  instance  money  is  considered  worth  4%.  At  a  higher  rate 
the  figures  would  decrease  slightly. 

Profits  on  Circulation. 

1082.  Two  per  cent  consols  of  1930 
Purchased  at  108^  on  January  i,  1903. 


$6,000.00 


Maximum  Circulation 

$100,000 

Receipts. 

Interest  on  Bonds 

2,000 

Interest  on  Circulation, 

4% 

4,000 

Gross  Receipts 

Deductions. 

Tax 

500.00 

Expenses 

62.50 

Sinking  Fund 

173-63 

Total 

Net  Receipts 

Int.  on  cost  of  bonds  at  4% 

736.13 

$5,263.87 
$4,340.00 

Profit  in  excess  of  4%  on  investment  923.87 

Per  cent.  0.851 

Average  Circulation. 

1083.  Inasmuch  as  the  circulation  tax  is  payable  only  on 
the  average  circulation  outstanding,  and  does  not  apply  on  cir- 
culation in  the  bank,  which  may  be  unsigned  or  in  transit  from 


368  COEPORATION   ACCOUNTING 

the  Comptroller's  office,  an  accurate  record  of  outstanding 
circulation  should  be  kept  for  each  business  day,  and  the  total 
divided  by  the  number  of  business  days  in  the  six  months  to 
obtain  the  average. 

Opening  the  Books. 

1084.  The  opening  entries'  for  the  Capital  Stock  of  a  bank 
are  so  simple  as  not  to  require  any  special  explanation.  It  is  a 
cash  proposition.  The  subscribers  may  be  charged  with  the 
amount  of  their  subscriptions  and  Capital  Stock  credited,  or 
all  the  entries  may  be  made  through  the  Cash  Book.  See 
example  No.  i  in  part  II. 

Commencing  With  Surplus. 

1085.  Many  banks  and  financial  corporations  desire  to 
commence  business  with  a  surplus ;  e.  g.,  they  pay  in  $125  on 
every  $100  stock.  For  such  make  the  opening  entry  in  this 
way. 


1086.     Sundries  Dr. 

John  Smith 

$12,500 

John  Jones 

12,500 

Wm.  Brown 

12,500 

James  Green 

12,500 

Sam  White 

12,500 

To  Capital 

Stock                                         $50,000 

To  Surplus 

12,500 

The  Subscribers  to  the 

capital  stock,  by  mutual  agreement. 

pay  a  premium  of  25%  in 

order  to  commence  business  with  a 

surplus. 

System 

of  Bookkeeping. 

1087.  It  is  impossible  to  demonstrate  in  this  chapter  a 
system  of  bank  bookkeeping,  or  to  illustrate  the  books  gen- 
erally used.  The  usual  accounts  carried  in  the  bank's  General 
Ledger,  (excepting  accounts  of  income  and  expense)  are 
shown  in  the  Statement  of  Resources  and  Liabilities  illustrated 
on  pages  360  and  361. 

Figuring  Interest. 

1088.  The  chief  source  of  revenue  to  a  bank  is  the  interest 
collected  on  loans  and  discounts,  and  while  interest  tables  are 
largely  used  in  banks,  a  knowledge  of  the  principles  involved 
in  calculating  interest  is  not  merely  important  but  very  es- 
sential. 


AND    CORPORATION    LAW  369 

What  is  Interest. 

1089.  Interest  is  the  premium  paid  per  centum,  or  per 
hundred,  for  the  use  of  money  borrowed.  The  rate  is  usually 
stated  by  the  year,  and  when  interest  is  charged  only  on  the 
principle  or  sum  loaned,  regardless  of  time,  it  is  called  simple 
interest.  When  deferred  or  overdue  interest* is  added  at  stated 
periods'  to  the  original  principle  to  form  a  new  principle  on 
which  to  calculate  interest,  this  process  is  called  compounding 
the  principle,  or  compound  interest. 

6  Per  Cent  Method. 

1090.  The  two  things  to  be  considered  in  figuring  interest 
are  accuracy  and  speed.  Commercial  usage  in  the  United 
States  having  divided  the  commercial  year  into  360  days, 
makes  possible  the  use  of  many  short  methods  of  figuring  in- 
terest. The  methods  most  generally  in  use  are  the  6%  method 
and  the  36%  method.  For  even  months,  that  is,  60,  90  or  120 
days,  the  6%  method  is  simplicity  itself.  To  find  the  interest 
on  any  sum  of  money  for  60  days  at  6%,  we  have  only  to  re- 
move the  decimal  place  two  points  to  the  left;  e.  g.,  the  in- 
terest on  $1175.80  for  60  days  at  6%  is  $11.76.  The  reason  for 
this  very  simple  rule  is,  that  6%  for  60  days  is  equivalent  to 
1%  for  360  days;  and  we  obtain  1%  of  the  principal  by  remov- 
ing the  decimal  two  places.  For  90  days  we  add  one  half; 
for  120  days  we  double  it  and  so  on.  For  5%  interest  we  sub- 
tract 1-6;  for  7%  we  add  1-6;  for  8%  we  add  1-3;  for  9%  we 
add  1-2;  for  10%  we  add  2-3. 

Thirty-Six  Per  Cent  Method. 

109 1.  To  figure  the  interest  on  any  amount  for  any  num- 
ber of  days  the  36%  method  is  the  quickest  and  most  accurate. 
This  method  is  based  on  the  principle  that  any  sum  of  money 
will  reproduce  the  principle  in  1000  days  at  36%  interest.  The 
philosophy  of  this  is'  very  apparent.  One  thousand  days  at 
6%  is  equal  to  360,000  days  at  1%  and  as  there  are  100  times  j 
360  in  360,000  it  follows  that  1%  for  360,000  days  is  equal  to  / 
100%  for  360  days,  or  i  year;  and  as  100%  is  a  reproduction 
of  the  principle  it  proves  our  premise. 

Any  Number  of  Days. 

1092.  Having  before  us  the  interest  for  1000  days  we  ob- 
tain the  interest  for  100  days,  10  days,  or  i  day,  by  removing 
the  decimal  one,  two,  or  three  places  to  the  left;  thus  the  in- 


370  CORPORATION   ACCOUNTING 

terest  on  $1055  ^o^  100  days  at  36%  is  $105 ;  for  10  days  $10.55  J 
for  I  day  $1.05.  For  an  odd  number  of  days,  say  75,  we  add 
7  times  the  interest  for  10  days,  and  5  times  the  interest  for 
one  day.  For  small  amounts  it  will  be  found  more  convenient 
to  multiply  by  the  number  of  days;  thus  $10  for  75  days 
should  be  figured  $750  for  i  day. 

Any  Rate  Per  Cent. 

1093.  Having  found  the  interest  at  36%,  we  obtain  the 
interest  at  any  per  cent  by  simple  division.  For  6%  divide  by 
6;  for  7%  divide  by  6  and  add  1-6;  for  8%  divide  by 
6  and  add  1-3;  for  9%  divide  by  4;  for  10%  divide  by 
6  and  9  and  add  both  quotients  together;  for  11%  di- 
vide by  3  and  subtract  1-12;  for  12%  divide  by  3;  for  5% 
divide  by  6  and  subtract  1-6;  for  4%  divide  by  9;  for  3%  divide 
by  12;  for  2%  divide  by  18  or  the  factors  of  18  successively. 
A  little  practice  will  make  one  very  rapid  in  this.  To  convert 
commercial  interest  into  accurate  interest  deduct  1-73,  because 
the  difference  between  360  and  365  days  is  5-365  or  1-73. 

2%  Accurate  Interest. 

1094.  It  is  customary  for  city  banks  to  pay  their  country 
correspondent  2%  interest  on  daily  balances,  and  as  a  rule 
accurate  (365  days)  interest  is  figured.  The  simplest  way  for 
the  city  bank  to  figure  this,  and  for  the  country  bank  to  prove 
it,  is  to  multiply  the  total  by  4,  divide  by  73  and  point  off  3 
figures.  This  is  equivalent  to  multiplying  the  total  by  2  and 
pointing  off  two  figures  to  get  2%  for  a  year,  and  dividing  by 
365  to  get  2%  for  a  day. 

Compound  Interest. 

1095.  The  compound  interest  on  any  sum  for  any  number 
of  periods  may  be  found  by  adding  the  simple  interest  for  the 
first  period  to  the  principal,  and  then  adding  the  simple  interest 
on  this  new  principal  to  itself,  and  by  continuing  this  process 
for  the  number  of  periods.  The  difference  between  the  final 
principal  and  the  original  will  be  the  compound  interest.  This 
method  while  accurate  is  altogether  too  laborious. 

By  Involution. 

1096.  Inasmuch  as  the  interest  is  a  certain  per  cent  of  a 
hundred,  it  is  obvious  that  the  principle  will  be  increased  each 
period  in  the  ratio  of  100:  100  +  the  rate  for  each  period, 
and  by  repeating  the  ratio  for  each    period    we    obtain    the 


AND   CORPORATION   LAW  371 

amount  of  the  principle  at  compound  interest.  The  interest 
itself  is  obtained  by  subtraction;  e.  g.,  take  $ioo  for  3  years 
at  6%.  The  interest  for  the  first  year  is  $6,  the  total  $106  or 
1.06  of  the  original  principle,  hence  the  ratio  of  increase  is  1.06 
for  every  period.  For  the  three  periods  it  is'  1.06  of  1.06  of 
1.06=1.06^;  therefore  by  raising  the  ratio  1.06  to  its  third 
power,  and  multiplying  this  by  100,  we  obtain  the  amount  of 
$100  for  3  years  at  6%  compound  interest;  subtracting  100 
from  the  total  we  have  the  interest.  If  the  interest  com- 
pounded half  yearly  the  ratio  would  be  1.03,  if  quarterly  1.015. 

1097.  In  general :  to  ascertain  the  amount  of  any  sum  for 
any  number  of  periods,  at  any  given  rate  of  compound  interest. 

1098.  Find  the  amount  of  $100  for  the  first  period,  divide 
this  by  100,  that  is,  point  off  two  places  to  the  left,  then  raise 
the  quotient  so  obtained  to  the  power  indicated  by  the  number 
of  terms,  multiply  the  principle  by  this  number  and  the  pro- 
duct will  be  the  amount  of  the  principal  at  compound  interest 
for  the  number  of  periods. 

By  Aliquot  Parts. 

1099.  Another  way  of  figuring  compound  interest,  and 
sometimes  a  simpler  way,  is  to  find  the  successive  interest  by 
means  of  aliquot  parts ;  thus  the  interest  on  $1000  for  4  years 
at  10%  would  be. 

10=1-10      $1000 

ioo=first  year's  interest. 


10=1-10         1 100 

I  io=second  year's  interest. 


10=1-10         1210 

I2i=third  year's  interest. 


10=1-10         1331 

i33.io=fourth  year's  interest 


Total  1464.10 

1 100.  Deduct  the  principal  and  the  remainder  is  the  com- 
pound interest  for  four  years'.  This  method  can  be  easily  ap- 
plied when  the  divisor  is  a  decimal  fraction  of  100,  such  as  2, 
2^,  5  and  so  on. 


372  CORPORATION  ACCOUNTING 

Discount. 

iioi.  Discount  is  the  abatement  made  when  a  sum  of 
money  is  paid  before  it  is  due.  Bank  Discount  is  simple  in- 
terest on  the  face  of  a  note  or  acceptance  deducted  in  advance. 
It  is  correctly  called  "false  discount"  by  the  Mathematicians, 
because  interest  is  collected  not  on  the  sum  loaned  but  on  this 
sum  plus  the  discount  charged;  that  is,  when  a  Danker  or 
broker  discounts  an  acceptance  at  6^^,  he  collects  more  than 
6%  interest. 

Present  Worth. 

1102.  The  present  worth  of  a  note  or  acceptance  is*  the 
principle  which  if  put  at  interest  for  the  given  time  and  at  the 
given  rate  would  amount  to  the  face  of  the  note,  draft,  or  ac- 
ceptance; and  ''true  discount"  is  the  interest  on  the  "present 
worth";  e.  g.,  the  false  discount  on  $ioo  due  6  months  hence 
at  6%  is  $3.00;  the  true  discount  is  $2.91;  i.  e.,  $97.09  for  6 
months  at  6%  would  amount  to  $100. 

"True  Discount." 

1 103.  What  would  be  the  true  discount  on  a  note  for  $5000 
for  3  months  at  6%?  The  present  worth  of  $101.50  three 
months  hence  is  $100,  hence  the  formula : 

101.50   :   100   ::  5000   :  $4926.  lo^present  worth. 
.  • .  true  discount  =  73-90 

True  vs.  False  Discount. 

1 104.  Suppose  a  man  wishes  to  discount  his  3  months  note 
at  6%  so  as  to  net  him  $5000 ;  for  what  amount  would  he  have 
to  draw  the  note?  Ans.  $5075.  Instead  of  deducting  a  false 
discount  of  $75  off  his  note  and  receiving  $4925,  he  adds  a  true 
discount  of  $75  to  his  note  and  receives  $5000.  Proof:  $100 
now,  at  the  above  rate,  is  worth  $101.50  three  months  from 
now ;  hence  the  formula  : 

100     :     101.50     ::     5000     :     $5075. 

1004  (a).  This  chapter  closes  the  practical  accounting  part 
of  this  work,  and  while  it  is  impossible  to  illustrate  every  con- 
ceivable form  of  organization,  and  every  vagary  of  manage- 
ment and  combination  the  author  believes  that  the  book- 
keeper or  accountant  who  studies  the  foregoing  pages  in- 
telligently and  applies  himself  diligently  to  his  task  can 
successfully  handle  the  books  of  any  corporation. 


CHAPTER  XXXIX. 

Stock  Exchanges — How  Organized  and  Conducted — Their 
Functions  and  Purposes — Cost  of  Membership — Methods  of- 
Operation  on  'Change — Rules  Governing  Delivery  of  Stocks 
and  Bonds — Defintions  of  Technical  Terms. 


1 105.  A  Stock  Exchange  is  a  regularly  organized  body  of 
brokers  acting  under  a  Constitution  and  By-Laws  and  a  well, 
defined  set  of  rules  and  regulations,  a  violation  of  which  on  the 
part  of  any  member  renders  him  liable  to  severe  penalties- 
Stock  Exchanges  are  something  more  than  mere  gambling: 
places,  they  are  economic  institutions  and  play  a  large  part  in. 
the  world's  commercial  and  financial  enterprises.  There  are- 
exchanges  of  various  kinds,  such  as  mining,  oil,  produce,  cot- 
ton, etc.,  and  most  every  large  city  has  one  or  more  of  these 
exchanges.  The  New  York  Stock  Exchange,  which  is  not  only 
the  largest  institution  of  its  kind  in  this  country,  but  in  the 
world,  deals  in  a  variety  of  stocks,  bonds  and  securities,  such 
as'  U.  S.  Government  Bonds,  State  and  Municipal  Bonds,  Rail- 
road Stocks,  Industrials,  etc.  An  idea  of  the  magnitude  of  the 
business  done  may  be  gained  by  a  study  of  the  sales  on  ex- 
change for  the  year  1904,  reported  by  Henry  Clews  &  Co.  in. 
their  Investment  Guide,  as  follows :  Railroad  and  Miscella- 
neous Stocks  $187,312,065,  Railroad  and  Miscellaneous  Bonds' 
$1,008,928,380,  Government  Bonds  $25,869,180,  State  Bonds- 
$2,012,000,  and  these  figures  do  not  include  unlisted  stocks, 
such  as  Bank  Stocks  and  Trust  Certificates.  In  this  country 
membership  in  exchanges  is  limited  and  seats  are  sold  at  prices 
depending  on  the  nature  of  the  exchange,  the  amount  of  busi- 
ness transacted,  the  prosperity  or  depression  of  the  times,  the 
activity  of  business,  etc.  In  London  the  membership  is  not 
limited.  An  entrance  fee  of  $2,000  is  charged  and  this  is  not 
transferable.  In  the  Berlin  Bourse  an  entrance  fee  of  $750  is 
charged,  not  transferable.  The  Paris  Bourse  is  a  government 
institution,  membership  being  subject  to  the  appointment  and 
control  of  the  government.  Membership  can  be  transferred 
or  bequeathed,  but  the  transferee  or  beneficiary  must  be  ap- 
proved by  the  government.  In  New  York  and  San  Franciscq. 
a  solvent  member  can  transfer  or  sell  his  seat,  but  the  pur- 


574  CORPORATION  ACCOUNTING 

chaser  must  be  acceptable  to  the  committee  on  membership. 
Som.e  of  the  wealthiest  men  in  the  United  States  have  been 
l)arred  from  membership  in  the  New  York  Stock  Exchange, 
so  it  will  be  seen  that  these  great  institutions  are  ethical  as 
well  as  financial.  Besides  the  cost  of  seats  the  members  are 
obliged  to  pay  an  annual  membership  fee. 

1106.  There  are  two  classes  of  members  in  all  exchanges — 
the  first  class  do  business  exclusively  for  themselves.    They  are 

7  the  big  guns,  the  bulls  and  the  bears,  the  shrewdest,  the  sharp- 
est and  most  daring.      The  second  class  do  business  on  com- 

^  mission  for  others,  for  only  members  of  the  exchange  can  do 
business  on  the  floor  of  the  exchange. 

1 107.  Not  every  exchange  confines  itself  to  legitimate  bus- 
iness and  not  every  broker  is  a  man  of  nicest  honor,  therefore 
too  much  care  cannot  be  exercised  in  the  selection  of  a  broker 
iDy  the  contemplative  investor.    Prices  of  stocks  often  fluctuate 

during  the  day  and  brokers  have  been  known  to  charge  their 
clients  a  point  or  two  above  the  purchase  price  and  deprive 
them  of  a  like  amount  on  the  sales,  thus  giving  them  what  the 
politicians  call  "the  double  cross."  The  broker's  legitimate 
profit  is  his  commission,  which  is  different  in  different  ex- 
changes and  which  is  a  certain  per  cent  each  way,  that  is,  on 
purchases  and  sales.  The  broker  takes  no  chances  for  his 
client,  the  client  puts  up  a  certain  margin  and  as  all  sales  are 
made  for  cash  the  broker  has  to  put  up  the  balance  which  he 
iDorrows  from  his  banker,  putting  up  the  stock  as  collateral  se- 
curity, and  charging  his  client  interest  on  the  money  borrowed. 
If  the  stock  drops  dangerously  near  the  margin  he  reserves  the 
right  to  demand  more  margin  or  sell  the  stock.  In  New  York 
the  members  who  deal  on  their  own  account  are  known  as 
scalpers  or  room-traders.  In  London  they  are  called  jobbers. 
In  Paris  they  are  not  allowed  to  deal  on  their  own  account. 
The  fact  that  stocks  are  listed  on  exchange  is  an  indication  that 
they  are  at  least  legitimate.  Before  stocks  or  bonds  of 
any  kind  are  placed  on  the  official  lists,  their  genuineness'  is 
-established  by  the  investigations  of  the  listing  committee,  and 
by  this  means  the  patrons  of  the  exchange  are  nominally  pro- 
tected. 

1 108.  By  listing  is  meant  the  entering  of  the  name  of  the 
stock  on  the  official  list  of  stocks  dealt  in  and  offered  for  sale 
by  the  board.  A  fixed  sum  is  charged  for  listing  for  the  first 
year  and  a  certain  yearly  fee  thereafter,  if  the  stock  is  to  re- 
main on  the  list. 


AND    CORPORATION   LAW 
New  York  Stock  Exchange. 

1 109.  The  New  York  Stock  Exchange  is  located  on  Walt 
street  with  an  entrance  on  Broad  and  one  on  New  Street.  It 
dates  back  as  far  as  1792,  and  to  those  who  would  like  to  know 
its  interesting  history,  its  historic  characters,  its  National  and 
International  influence,  its  effect  on  trade  and  commerce,  on 
war  and  peace,  on  civilization  and  finance  I  commend  them  to 
a  study  of  "28  years  in  Wall  Street"  by  Henry  Clews.  The 
brokers  congregate  on  the  main  floor  of  the  building  or  palace,, 
where  the  exchange  meets  and  gather  in  groups  about  the  va- 
rious posts  that  are  placed  thereon  at  about  equal  distances 
apart.  Each  post  bears  the  name  of  one  or  more  stocks  that 
are  dealt  in,  and  the  broker  desiring  to  buy  or  sell  a  certain 
stock  (say  Erie,  New  York  Central,  or  Lake  Shore),  proceeds 
to  the  spot  where  the  name  of  that  stock  is  painted  conspicu- 
ously on  the  post.  Hfe  then  offers  to  sell  or  bids  to  buy  the 
stock  and  sometimes  the  scene  about  one  of  these  posts  is  quite 
animated.  Shouting  brokers  are  climbing  over  each  other  in  a 
frantic  effort  to  sell  or  crowding  with  all  their  might  to  get  a 
chance  to  buy.  Dealing  may  go  on  at  these  posts  or  corners' 
at  any  time  while  the  exchange  is  open,  as  in  the  New  York 
Exchange  stocks  are  not  called  as  they  are  in  San  Francisco 
and  elsewhere — trading  commencing  simultaneously  in  all 
stocks  listed  when  the  Exchange  opens  for  business. 

mo.  Memberschip  in  the  New  York  Stock  Exchange  is 
limited  to  1,100.  Seats  were  worth  in  January  1905  $80,000 
each,  which  is  much  more  than  in  any  other  exchange  in  the 
world.  I  will  give  some  of  the  rules  of  the  exchange  which 
affect  outsiders  in  their  dealings  with  members  of  the  Ex- 
change. 

Rules  Regarding  Commissions. 

ARTICLE  XLIII. 

mi.  Section  i.  Commissions  shall  be  charged  and  paid 
under  all  circumstances,  and  upon  all  transactions',  both  pur- 
chases and  sales  or  upon  contracts  for  the  receipt  or  delivery 
of  securities.  Such  commissions  shall  be  calculated  in  all  cases 
upon  the  par  value  of  securities,  and  shall  be  at  the  rates  here- 
inafter named ;  and  such  rates  shall  be  in  each  case  the  lowest 
commission  that  may  be  charged  by  any  member  of  the  Ex- 
change, and  shall  be  absolutely  net  and  free  from  all  or  any 
rebatement,  return,  discount  or  allowance  in  any  shape  or  man- 
ner whatsoever,  or  by  any  method  or  arrangement,  direct  or 
indirect.      And  no  bonus,  percentage  or  portion  of  the  com- 


576  COKPORATION   ACCOUNTING 

mission  so  established  shall  be  given,  paid  or  allowed,  directly 
or  indirectly,  to  any  clerk  or  person  for  business  sought  or  pro- 
cured for  any  member  of  the  Exchange. 

Sec.  2.  On  all  business  for  parties  not  members  of  the 
exchange,  including  joint  account  transactions  in  which  a  non- 
member  is  interested,  transactions  for  partners  not  members 
of  the  Exchange,  and  for  firms  of  which  the  Exchange  member 
or  members  are  special  partners  only,  the  commission  charged 
shall  not  be  less  than  ^  of  i  per  cent. 

Sec.  5.  Any  member  offering  to  do  business  for  less  than 
the  foregoing  rates  violates  this  Article,  and  is  subject  to  the 
penalty  for  so  doing. 

Sec.  7.  The  penalty  for  a  violation  of  this  Article  shall  be, 
for  the  first  offense,  suspension  for  a  period  of  from  one  to 
five  years,  the  term  to  be  fixed  at  the  discretion  of  a  majority 
of  the  Governing  Committee  present  at  a  meeting  thereof.  For 
the  second  offense  the  penalty  shall  be  expulsion  and  the  mer- 
bership  of  the  party  expelled  shall  be  disposed  of  forthwith  by 
the  Committee  on  Admissions. 

1 1 12.  It  will  be  observed  from  Section  i  that  commissions 
are  charged  on  the  par  or  nominal  value  of  all  stocks  and  se- 
curities, that  is  to  say,  New  York  Central  Stock  is  worth  at  par 
$100  a  share  but  it  may  be  worth  in  the  market  only  $90  a 
share.  Now  suppose  a  man  wants  to  buy  100  shares  of  this 
stock,  the  par  value  of  which  is  $10,000,  he  puts  up  a  margin 
-of  $1,000.  His  broker  credits  him  with  $1,000  and  buys  the 
stock  for  his  account  for  $9,000,  charging  his  account  with 
$9,000  and  $12.50  commission,  which  is  one-eighth  of  i  per  cent 
on  $10,000.  He  then  puts  up  the  balance  of  the  purchase  price 
$8,000,  either  out  of  his  own  funds  or  funds  secured  from  his 
banker.  His'  client  then  orders  him  to  sell,  he  does  so  and  then 
charges  him  another  $12.50  commission  and  interest  on  the 
"$8,000  he  borrowed  or  advanced  for  him  at  the  prevailing  rate 
of  interest,  the  balance  then  stands  to  the  client's  credit  unless 
the  account  is  to  be  closed.  It  often  happens  that  the  broker 
makes  something  on  the  interest  charged.  For  example  the 
prevailing  rate  of  interest  may  be  6  per  cent,  but  the  broker 
may  be  able  to  borrow  money  at  4  per  cent  so  he  makes  the 
difference  of  2  per  cent.  Of  course  in  putting  up  collateral  se- 
curity the  broker  has  to  put  up  collateral  away  in  excess  of  the 
amount  borrowed,  from  this  it  will  be  seen  that  the  broker  has 
to  have  a  large  capital  of  his  own  on  which  to  operate.  If  a 
broker  buys  or  sells  stock  at  a  premium  he  gets  his  commis- 
sion on  the  par  value  only,  so  it  will  be  seen  that  the  rule  works 
both  ways. 


AND    CORPORATION    LAW  377 

1 1 13.  The  broker  has  other  opportunities  of  making 
money  without  taking  the  risk  of  buying  or  selHng  on  his  own 
account.  For  instance,  it  often  happens  that  one  customer 
sells  and  another  buys  a  given  number  of  shares  of  the  same 
stock.  In  this  case  the  broker  neither  buys  nor  sells'  a  single 
share,  but  simply  charges  to  the  account  of  the  purchasing 
customer  the  amount  that  would  be  required  to  buy  the  stock, 
and  on  the  other  hand,  he  credits  the  selling  customer  with  the 
amount  which  the  shares  would  bring  if  really  sold  on  ex- 
change. The  purchasing  customer's  account  then  shows  a 
debit  balance  on  which  interest  is  charged  at  the  ruling  rate. 
At  the  same  time  the  selling  customer  is  charged  a  bonus  for 
the  use  of  the  shares  of  stock  which  it  would  have  been  neces- 
sary for  the  broker  to  borrow  in  order  to  make  good  his  de- 
livery had  he  really  sold  the  shares  on  'change.  Thus  the  broker 
is  protected  from  loss  no  matter  which  way  the  market  goes, 
while  he  gets  his  commission  for  buying  and  selling,  his  in- 
terest on  money  supposed  to  have  been  borrowed,  and  his  ijLU 
bonus  on  stock  certificates  supposed  also  to  have  been  bor- 
rowed, when  as  a  matter  of  fact  he  has  neither  bought,  sold 

nor  borrowed  but  simply  made  a  few  entries  on  his  books. 

Rules  For  Delivery  of  Stocks  and  Bonds. 

1 1 14.  The  signature  to  the  assignment  upon  a  certificate 
of  stock  must  be  technically  correct,  i.  e.,  it  must  correspond 
with  the  name  as  written  updn  the  face  of  the  certificate  in 
every  particular,  without  alteration  or  enlargement,  or  any 
change  whatever.  "Mr.,"  ''Messrs."  or  "Esq.,"  however,  need 
not  be  prefixed  or  affixed  to  signatures. 

"Brothers  must  be  endorsed  exactly  as  drawn,  not  "Bros." 
and  vice  versa.  All  prefixes  and  affixes,  such  as  "Judge," 
"Major,"  "Hon.,"  "Right  Hon.,"  "Doctor,"  "D.  D.,"  "L.L.  D.," 
etc.,  must  appear  in  the  endorsement. 

"And"  may  be  written  "«Sz;,"  and  vice  versa. 

"Company'  may  be  written  "Co."  and  vice  versa. 

1 1 15.  Certificates  in  the  name  of  married  women  are  not  a 
good  delivery  while  the  transfer  books  are  open;  v^hen  the 
transfer  books  are  closed  a  joint  execution  of  the  assignment, 
by  the  husband  and  wife  and  a  joint  acknowledgment  before 
a  Notary  Public  will  make  the  certificate  a  delivery  only  dur- 
ing the  closing  of  transfer  books. 

1 1 16.  Powers  of  attorney  or  of  substitution  or  assignments 


378  CORPOEATION  ACCOUNTING 

signed  by  Trustees,  Guardians,  Infants,  Executors,  Adminis- 
trators, Agents  or  Attorneys,  are  not  a  good  delivery. 

1 1 17.  When  transfer  books  are  closed  by  any  legal  impedi- 
ment, so  as  to  render  their  being  open  again  uncertain.  Powers 
of  Attorney  must  be  acknowledged  before  a  Notary  Public, 
with  seal  and  date. 

1 108.  An  endorsement  by  a  number  of  the  Exchange,  or  a 
firm  represented  at  the  Exchange,  on  a  Certificate,  is  consid- 
ered a  guarantee  of  the  correctness  of  the  signature  of  tKe 
party  in  whose  name  the  stock  stands.  In  all  cases  where 
Powers  of  Substitution  are  used,  the  original  assignment  and 
Power  of  Attorney,  and  each  Power  of  Substitution,  must  be 
guaranteed  by  a  member  or  a  firm  represented  in  the  Ex- 
change, resident  or  doing  business  in  New  York. 

1 1 19.  A  detached  Power  of  Attorney,  or  of  substitution 
must  contain  a  full  description  of  the  Stock  or  Bond  by  name 
of  Company,  and  number  of  certificate,  and  must  be  acknowl- 
edged or  proved  before  a  Notary  Public,  with  seal  and  date.  A 
separate  power  and  acknowledgement  must  accompany  each 
certificate. 

1 120.  Certificates  in  the  name  of  an  institution,  or  in  a 
name  with  title  affixed,  as  Cashier,  President,  or  other  official 
designation,  are  not  a  good  delivery,  unless  assignment  is  ac- 
knowledged before  a  Notary  Public,  with  seal  and  date,  who 
must  certify  that  he  knows  the  person  signing,  and  knows  him 
to  be  the  person  authorized,  and  that  he  has  seen  the  minutes 
of  the  institution,  authorizing  said  person  to  make  the  assign- 
ment. Some  Companies  require,  in  addition,  a  certified  copy 
of  the  resolutions  of  the  Directors  of  the  Company  in  whose 
name  the  stock  stands  authorizing  the  assignment,  as  Western 
Union  Telegraph,  the  Companies  having  their  Transfer  Agen- 
cies at  Grand  Central  Station  and  American  Sugar  Refining 
Company,  etc. 

1 121.  The  several  Companies  having  Transfer  Offices  at 
Grand  Central  Station,  Forty-second  street,  require  Power  on 
Certificate,  in  the  name  of  a  foreign  resident,  to  be  acknowl- 
edged before  a  United  States  Consul,  or  before  J.  S.  Morgan 
&  Co.,  London. 

1 122.  A  certificate  for  more  than  100  shares  is  not  a  good 
delivery.  Certificates  for  less  than  100  shares  are  a  good  de- 
livery in  lots  of  100  shares.  The  receiver  may  in  all  cases  re- 
quire delivery  by  Transfer,  provided  there  be  ample  time  to 
make  it  and  transfer  books  are  open. 


AND    CORPORATION    LAW  379 

1 123.  When  a  claim  is  made  for  a  dividend  on  stock  after 
the  transfer  books  have  been  closed,  the  party  in  whose  name 
the  stock  stands,  may  require  from  the  claimant  presentation 
of  the  Certificate,  and  a  written  statement  that  he  was"  the 
holder  of  the  Stock  at  the  time  of  the  closing  of  the  books,  and 
also  guarantee  against  any  future  demand  for  the  same. 

1 124.  Coupon  Bonds  issued  to  bearer,  having  an  endorse- 
ment upon  them  not  properly  pertaining  to  them  as  Security, 
must  be  sold  specifically  as  ''Endorsed  Bonds"  and  will  not  be 
regarded  as'  a  good  delivery  under  a  sale  not  so  qualified. — 
Resolution  of  Governing  Committee,  adopted  May  23,  1883. 

1 125.  Bonds  with  a  stamp  or  endorsement  stating  that 
they  have  been  deposited  with  States  as  security  for  Bank  cir- 
culation or  insurance  must  be  released  and  acknowledged  be- 
fore a  Notary,  and  then  are  a  good  delivery  only  as  "Endorsed 
Bonds." 

1 126.  If  a  definite  name,  such  as  John  Smith,  John  Brown, 
Bank  of  America,  Canton  Company,  appears  upon  a  bond,  it  is 
regarded  as  implying  ownership  which  must  be  released,  with 
acknowledgement  before  a  Notary.  The  Bond  is  then  a  good 
delivery  only  as  an  "Endorsed  Bond." 

1 127.  Bonds  with  assignments  or  releases  executed  by 
Trustees,  Guardians,  Infants,  Executors,  Administrators, 
Agents,  or  Attorneys,  are  not  a  good  delivery  as'  "Endorsed 
Bonds." 

1 128.  Coupon  Bonds — Delivery  must  be  of  the  denomina- 
tion of  $1,000  or  $500.  Large  Bonds  (over  $1,000)  or  Small 
Bonds  (under  $500)  good  only  in  special  transactions. 

1 129.  Registered  Bonds — Deliveries  must  be  in  certificates 
not  exceeding  $10,000. 

1 130.  Coupons  on  a  bond  must  be  those  which  properly 
belong  to  it,  of  the  corresponding  number.  In  case  of  absence 
of  any  Coupon,  its  full  face  amount  in  money  is  a  good  substi- 
tute, unless  special  notice  is  given  to  the  contrary;  provided, 
however,  that  in  case  of  absence  of  a  past  due  coupon  from  a 
bond  of  which  any  of  the  past  due  coupons'  have  been  paid 
with  interest,  its  full  face  value  in  money,  with  interest  thereon 
to  date  of  delivery,  is  only  a  good  substitute. 

1 137.  Coupon  Bonds  which  can  be  registered  in  a  name 
or  to  Bearer,  and  which  have  been  registered  in  a  name,  must 
be  registered  to  Bearer  to  be  a  delivery.  When  transfer  books 
are  closed,  if  registered  in  a  name,  a  Power  of  Attorney,  ac- 
knowledged before  a  Notary,  in  name  of,  witnessed  or  guar- 
anteed by  a  member,  must  accompany  each  Bond. 


380  CORPORATION  ACCOUNTING 

Government  Bonds  (Registered.) 

1 132.  The  execution  and  acknowledgement  of  U.  S.  Regis- 
tered Bonds,  when  not  made  at  the  Treasury  Department, 
must  be  before  a  U.  S.  Judge,  U.  S.  District  Attorney,  Clerk  of 
a  U.  S.  Court,  Collector  of  Customs,  Collector  or  Assessor  of 
Internal  Revenue,  U.  S.  Treasurer  or  Assistant  Treasurer,  or 
the  President  or  Cashier  of  a  National  Bank  or,  if  in  a  foreign 
country,  before  a  U.  S.  Minister,  or  Consul.  In  all  cases  the 
officer  must  add  his  official  designation,  residence  and  seal,  if 
he  has'  one. 

1 133.  When  the  assignment  is  made  by  a  corporation  it 
must  be  named  as  the  assignor ;  when  by  a  Guardian,  Trustee 
Executor,  Administrator,  an  Officer  of  a  Corporation,  or  any 
one  in  a  representative  capacity,  proof  of  his  authority  to  act 
must  be  produced  to  the  officer  before  whom  the  assignment 
is  made  and  must  accompany  the  bond. 

1 134.  In  all  the  large  cities  of  the  world  large  private 
banking  institutions  buy  and  sell  stocks  and  bonds  on  commis- 
sion. In  New  York  there  are  many  such  institutions  members 
of  the  New  York  Stock  Exchange  and  they  execute  orders  for 
investment  or  on  margin  and  act  as  fiscal  agents  for  corpora- 
tions. On  account  of  its  acknowledged  authority  we  quote  the 
following  from  Henry  Clews  &  Co.'s  Investment  Guide  for  the 
value  of  the  information  it  contains. 

1 135.  Securities  are  often  invalidated  by  the  improper 
writing  thereon  of  foreign  matter  by  persons  not  familiar  with 
the  forms  and  technicalities  to  be  observed  in  making  transfers 
and  deliveries.  For  instance  any  writing  on  a  coupon  bond 
(other  than  that  made  by  a  duly  authorized  agent  of  the  com- 
pany issuing  it)  makes  what  is  technically  termed  an  ''en- 
dorsed" or  "unclean"  bond,  and  its  value  in  the  market  ever 
after  is  greatly  diminished  thereby.  Serious  inconvenience, 
sometimes  accomplished  by  a  loss  of  money,  also  frequently 
happens  where  a  certificate  of  stock  or  a  registered  bond  has* 
been  improperly  signed  or  filled  in  on  the  back. 

Some  Technical  Terms  Used  on  Exchange. 

1 136.  Bulls.  The  term  "Bull"  is  derived  from  the  ten- 
dency of  a  bull  to  raise  up  with  his  horns  obstacles  that  come 
in  his  way.  It  is  applied  to  brokers  who  being  ''long"  on  cer- 
tain stocks  try  to  advance  the  price  in  order  to  compel  others 
to  buy,  who  have  contracts'  to  fill,  hence  bulling  the  market  on 
certain  stocks,  means  scheming  on  the  part  of  the  holders  of 


AND    CORPORATION   LAW  381 

such  stocks  to  inflate  or  increase  the  market  price  of  those 
stocks. 

1 137.  Bears.  The  term  "Bear"  is  derived  from  the  char- 
acteristic of  the  bear  to  tear  down,  hence  the  bear  on  change 
is  the  broker  who,  being  short  on  stocks  or  wishing  to  buy 
stocks  to  fill  his  orders,  seeks  to  tear  down  or  depreciate  the 
value  of  the  stocks  he  desires  to  purchase.  The  bears  achieve 
their  purpose  by  various  methods — one  being  to  offer  the  stock 
they  wish  to  "bear"  away  down,  causing  a  scare  among  others 
holding  the  same  stock,  who  also  oft'er  it,  and  the  uears  buy  it 
up  and  gain  their  point. 

1 138.  Long  of  Stocks:  When  an  operator  buys  a  large 
amount  of  stock  and  holds  it  in  the  hope  of  a  raise  in  prices  he 
is  said  to  be  long  on  stocks. 

1 139.  Short  of  Stocks:  When  an  operator  sells  more 
stock  than  he  controlls  or  possesses,  in  the  hope  that  he  can 
buy  it  at  a  less  figure  and  thereby  reap  a  profit,  he  is  said  to  be 
"short  of  stocks"  or  to  have  sold  short. 

1 140.  A  Point:  By  a  point  is  meant  i  per  cent  on  the  par 
value  of  the  stock  or  bond,  as  the  case  may  be,  not  on  the  mar- 
ket value. 

1 141.  Puts:  A  written  or  printed  agreement  or  contract 
with  a  broker  by  which  he  agrees  or  contracts  to  buy  a  certain 
number  of  shares  of  specified  stock  at  a  stipulated  price  any 
time  within  thirty  days.  It  is  understood  that  he  is  to  have  one 
day's  notice  excepting  on  the  expiration  of  the  time  limit.  For 
this  privilege  you  pay  your  broker  a  certain  sum,  a  sort  of  in- 
surance for  the  risk  he  takes.  The  word  "put"  in  this  instance 
is  controvertible  with  "sell,"  as  to  put  a  man  stock  means  to 
sell  him  the  stock. 

1 142.  Calls:  A  call  is  opposed  to  a  "put,"  being  a  con- 
tract with  your  broker  giving  you  the  right  to  call  on  him  in- 
side of  thirty  days  for  a  certain  number  of  shares  of  a  certain 
specified  stock  at  a  stipulated  price.  You  also  pay  him  for  this 
privilege,  as  he  is  obliged  to  deliver  the  stock  to  you  within 
the  specified  time  at  the  price  agreed  upon,  no  matter  what 
the  market  price  may  be.  Usually  the  man  who  has'  the  "call" 
wants  to  get  that  particular  stock  and  not  having  available 
funds  he  enters  into  a  contract,  so  that  he  may  obtain  it  at  the 
call  price  when  his  funds  are  available.  "Call'  is  controvertible 
with  "buy." 

1 143.  A  Spread:  A  contract  with  a  broker  giving  you  the 
privilege  to  put  him  a  certain  number  of  shares  of  a  certain 
stock  at  a  stipulated  price  within  thirty  days,  or  to  call  on  him 


382  CORPORATION   ACCOUNTING 

for  a  like  amount  under  like  conditions  is  called  a  ''spread.'* 
For  this  privilege  you  pay  him  twice  the  sum  paid  for  a  ''put" 
or  a  "call"  contract. 

1 144.  A  Straddle:  When  a  broker  is  "long"  of  one  op- 
tion and  "short"  of  another,  or  when  he  buys  in  one  market 
for  future  delivery  and  sells  in  another  he  is  said  to  have 
straddled  the  market. 

1 145.  Spread  Eagle:  This  is  the  term  given  to  the  trans- 
action of  a  broker  who  sells  a  certain  number  of  shares  on  a 
certain  time,  and  buys  a  like  number  of  shares  on  the  same 
time  at  a  lower  figure.  For  example  a  broker  may  sell  100 
shares  of  stock  at  $100  a  share  to  be  delivered  thirty  days  from 
date,  and  he  may  then  turn  around  and  buy  100  shares  of  the 
same  stock  at  $95  a  share  to  be  delivered  to  him  in  thirty  days. 
If  both  deliveries  occur  on  the  same  day  he  makes  a  profit  of 
$5  a  share,  but  if  he  was  obliged  to  deliver  the  stock  he  sold 
before  he  could  obtain  the  stock  he  purchased,  he  would  be 
compelled  to  purchase  sufficient  stock  to  fulfill  his  contract, 
no  matter  what  the  market  value  of  it  was. 

1 146.  Wash  Sale:  This  is  a  fictitious  sale  between  two 
brokers  for  the  purpose  of  influencing  further  sales  in  a  par- 
ticular stock.  The  object  may  be  either  to  increase  or  decrease 
the  price  of  a  particular  stock,  by  creating  a  false  impression 
as  to  its  market  value. 

1 147.  A  Regular  Sale:  A  sale  made  one  day  and  payable 
before  2  o'clock  the  next  day. 

1 148.  A  Cash  Sale:  A  sale  where  the  stock  is  to  be  de- 
livered and  paid  for  the  same  day. 

1 149.  Making  a  Turn:  Selling  for  cash  and  buying  the 
same  stock  on  regular  sale  is  called  "making  a  turn." 

1 1 50.  Milking:  This  is  a  form  of  "bearing."  It  is  worked 
by  a  clique,  one  or  more  of  whom  reduce  the  price  of  a  certain 
stock  for  the  purpose  of  inducing  holders  to  sell,  when  the 
clique  steps  in  and  buys. 

1 151.  Busy  Bees:  This  is  an  apellation  given  to  cliques 
or  combinations  of  brokers  who  unite  for  the  purpose  of  in- 
fluencing the  price  of  certain  stocks. 

1 1 52.  A  Syndicate  is  a  union  of  capitalists  who  combine 
their  resources  for  the  accomplishment  of  some  financial  ob- 
ject, such  as  the  purchase  of  an  issue  of  Government  Bonds, 
certain  railroad  or  steamship  bonds  or  some  other  large  finan- 
cial enterprise. 

1 153.  Curbstone  Brokers :  Men  who  do  a  brokerage  busi- 
ness outside  of  the  exchange  or  on  the  curb  are  called  curb- 


AND    CORPORATION   LAW  383 

Stone  brokers.  Many  good  and  honorable  men  are  curbstone 
brokers,  but  their  financial  circumstances  will  not  permit  them 
to  be  brokers  on  'change,  many  others  are  of  course  mere  spec- 
ulators who  have  no  capital  invested.  They  are  not  bound  by 
any  set  rules  like  the  members  of  the  exchange,  and  often  buy 
and  sell  after  regular  exchange  hours.  A  stajsr  is  another  name 
for  the  man  who  does  business  on  the  outside. 

1 1 54.  Bucket  Shops:  These  establishments  pretend  to 
do  a  Stock  Exchange  business,  but  as  a  matter  of  fact  they 
never  transfer  or  deliver  the  stocks  in  which  they  nominally 
deal.  They  are  mere  gambling  places  where  they  take  and 
register  small  bets  on  the  rise  and  fall  of  stocks  in  which  they 
are  nominal  dealers. 

1 1 55.  A  Boom:  A  large  increase  in  value  and  a  corre- 
sponding expansion  of  credit  is  described  as  a  boom. 

1 1 56.  A  Flurry:     Is  a  small  or  undeveloped  boom. 

1 157.  A  Panic:  This  is  a  contraction  or  collapse  of  credit, 
following  a  scare  among  speculators  which  causes  a  reduction 
in  prices. 

1 1 57.  A  Pool:  Sometimes  a  number  of  brokers  pool  or 
put  into  a  common  fund  a  large  sum  of  money  for  the  purpose 
of  manipulating  certain  stocks  to  their  advantage,  and  then 
the  profits  are  divided  pro  rata.  It  sometimes  resembles  a 
syndicate. 

1 1 58.  A  Corner:  When  a  heavy  operator  or  combination 
of  operators  buy  and  hold  all  of  a  certain  kind  of  stock  for  the 
purpose  of  creating  a  scarcity,  and  artifically  raising  the  price, 
he  or  they  are  said  to  have  cornered  the  market.  They  often 
know  before  hand  that  certain  brokers  have  sold  short  on  this 
particular  stock  and  by  getting  a  corner  on  it  they  compel  the 
"shorts"  to  buy  at  their  own  prices. 

1 1 59.  Sellers  or  Buyers  Option  or  Future  Sales:  This  is 
a  privilege  given  to  either  party,  of  delivering  the  stock  any 
time  within  the  number  of  days  specified. 

1 160.  Fill  or  Cover:  When  an  operator  sells  more  stock 
than  he  has,  he  is  said  to  have  sold  short,  when  he  buys  stock 
to  cover  the  shortage  which  enables  him  to  meet  his  contract 
he  is  said  to  fill  or  cover. 

1 161.  Lame  Duck:  An  operator  who  has  lost  heavily, 
and  is  consequently  crippled,  but  who  has  not  failed  in  his 
contracts,  is  called  a  lame  duck. 

1 162.  A  Dead  Duck:  A  broker  who  is  unable  to  meet  his 
contracts  is  called  a  dead  duck. 


384  CORPORATION  ACCOUNTING 

1 163.  Sell  Buyer  3:  This  is  the  exchange  way  of  express- 
ing a  transaction  where  the  buyer  has  the  option  of  taking  his 
purchase  either  on  the  day  of  purchase  or  on  any  one  of  the 
three  following  days,  free  of  interest. 

1 164.  Sell  Seller  3:  This  is  the  same  as  the  preceeding 
transaction  with  this  difference,  that  the  option  rests  with  the 
seller  instead  of  the  buyer.  Of  course  the  number  of  days  must 
not  necessarily  be  three. 

1 165.  Dividend  on:  Means  that  the  dividend  goes  to  the 
purchaser. 

1 166.  Ex.  Dividend:  Means  that  the  dividend  does  not 
go  to  the  purchaser. 

1 167.  Ex.  Coupon:  Means  that  the  coupon  does  not  go 
with  the  sale. 

1 168.  Interest:  This  means  that  the  purchaser  gets  the 
interest. 

1 169  B  Flat:  This  means  that  the  purchaser  does  not 
get  the  interest. 

1 170.  90@9i :  Means  that  90  is  offered  and  that  91  is 
asked,  or  in  other  words,  if  you  want  to  sell  you  can  get  90 
and  if  you  want  to  buy  you  will  have  to  pay  91. 


CHAPTER  XL. 


Brief  Summary  of  the  Corporation  Laws  of  All  the  States 
and  Territories — Number  Necessary  to  Incorporate — Terms 
of  Corporate  Existence — Stockholders  Liability — Various 
Privileges  and  Restrictions — Legal  and  Contract  Rates  of  In- 
terest— Penalties  For  Usury. 


Alabama. 

1 171.  Three  or  more  persons'  may  form  a  corporation  un- 
der the  general  laws  of  Alabama.  The  liability  of  stockholders 
exists  only  up  to  the  par  value  of  the  stock.  Beyond  any  bal- 
ance due  on  stock  there  is  no  further  liability.  Stock  can  be 
issued  only  for  money,  labor  performed  or  property  actually 


AND    CORPORATION    LAW  385 

received,  and  all  fictitious  increase  of  stock  or  indebtedness 
shall  be  void.  Preferred  stock  can  be  issued  only  on  the  con- 
sent of  tv^o-thirds  of  the  stock  in  interest.  Private  corpora- 
tions have  a  lien  on  the  shares  of  their  stockholders  for  any 
debt.  The  right  to  sue  and  defend  is  the  same  as  that  of  nat- 
ural persons. 

Foreign  corporations  doing  business  in  this  State  must 
have  at  least  one  place  of  business  and  an  authorized  agent. 
When  such  foreign  corporations  are  empow^ered  by  their  char- 
ters, they  may  own  and  hold  stock  of  corporations  created  in 
this  State.  Under  this  provision  a  New  Jersey  holding  com- 
pany could  gain  control  of  an  Alabama  corporation. 

1 171  (b).  The  legal  and  contract  rate  of  interest  in  this 
State  is  8%,  and  usury  is  punishable  by  the  forfeiture  of  all 
interest. 

Arkansas. 

1 172.  A  Corporation  may  be  formed  in  this  State  by  three 
or  more  persons  subscribing  to  articles  of  association  setting 
forth  its  purpose,  its  capital  stock,  the  number  of  shares, 
amount  actually  paid  in  etc.  The  Capital  Stock  must  be  di- 
vided into  shares  of  $25  each.  The  Capital  Stock  may  be  in- 
creased or  reduced  and  the  name  and  number  of  directors 
changed,  but  there  must  not  be  less  than  three  directors ;  and  the 
Secretary  and  Treasurer,  who  must  be  directors,  are  required 
to  reside  in  the  State.  The  President  and  Secretary  are  re- 
quired to  file  annual  statements,  showing  financial  condition, 
with  the  County  Clerk.  Corporations  may  take  land  in  pay- 
ment of  debts.  Stockholders  are  liable  only  for  amount  of  un- 
paid subscription,  and  stock  may  be  sold  to  pay  delinquent 
assessments. 

Foreign  corporations  must  have  a  resident  agent  in  this 
State  upon  whom  summons  can  be  served.  Failure  to  appoint 
a  resident  agent  renders  all  their  contracts  void  as  to  them, 
but  enforcible  against  them. 

1 172  (a).  The  legal  rate  of  interest  is  6%.  By  contract 
10%.  Penalty  for  usury,  forfeiture  of  both  principle  and  in- 
terest. 

Colorado. 

1 173.  Every  corporation  for  profit  formed  in  this  State 
except  the  business  of  banking,  must  commence  its  name  with 
"The"  and  end  with  ''Corporation."  Three  or  more  persons 
may  organize  a  corporation  in  this  State  for  a  term  not  to  ex- 


386  CORPORATION   ACCOUNTING 

ceed  twenty  years.  Corporations  may  sue  and  be  sued  same 
as  individuals.  Stock  shares  must  not  be  less  than  $i.oo  nor 
more  than  $ioo.  Stockholders  liability  is  limited  to  the  pay- 
ment for  their  stock.  Stock  may  be  issued  in  payment  of  prop- 
erty, and  it  is  quite  usual  in  case  of  mining  companies  to  issue 
their  stock  in  payment  for  a  mine  and  file  a  certificate  of  paid- 
up  stock.  All  Stock  is  personal  property.  Persons  holding 
stock  as  collateral  are  not  liable  for  corporate  debts,  providing 
they  appear  on  the  books  of  the  corporation  as  pledgees.  As 
pledgees  they  may  vote  this  stock  at  corporate  meetings. 

Foreign  corporations  must  file  a  very  comprehensive  state- 
ment with  the  Secretary  of  State ;  they  must  have  a  principal 
place  of  business  and  designate  an  authorized  agent ;  and  they 
shall  be  subject  to  all  the  liabilities  and  restrictions  imposed 
upon  domestic  corporations. 

1 173  (^)-  The  legal  rate  of  interest  is  8%.  By  contract, 
any  rate.    No  grace  allowed. 

Connecticut. 

1 174.  Three  or  more  persons  may  form  a  corporation  in 
this  State.  The  par  value  of  the  shares  shall  be  $25,  $50  or 
$100.  Articles  of  association  must  be  published  in  a  news- 
paper. The  certificate  filed  with  the  Secretary  of  State  must 
set  forth  the  names  and  residences  of  subscribers,  the  amount 
of  their  subscriptions,  the  amount  actually  paid  in  cash,  and 
the  amount  paid  in  property.  At  least  20%  must  be  paid  in 
cash,  and  subscriptions  must  be  in  the  names  of  bona  fide  sub- 
scribers, not  dummies.  The  name  of  every  corporation  must 
commence  with  ''The"  and  end  with  "Co."  or  "Company." 
The  name  of  a  corporation  may  be  changed  on  application  to 
the  Superior  Court,  and  the  purposes  of  a  corporation  may  also 
be  changed  by  a  two-thirds  vote  of  all  the  stock  and  the  filing 
of  amended  articles.  Corporations  may  not  commence  busi- 
ness in  this  State  until  all  the  stock  is  subscribed  for,  and  at 
least  20  per  cent  paid  in  cash.  The  capital  may  be  increased 
or  decreased,  and  the  par  value  of  the  shares  changed  by  a  two- 
thirds  vote  of  all  the  stock.  A  corporation  may  sell  the  stock 
of  any  stockholder  to  satisfy  any  debt  he  may  owe  the  com- 
pany, by  giving  proper  notice  of  such  sale.  The  liability  of 
stockholders  is  limited  to  the  amount  of  their  subscriptions ; 
but  if  any  of  the  capital  stock  is  withdrawn  or  refunded  to  any 
stockholder,  such  stockholder  is  liable  for  the  amount  so  with- 
drawn. Any  stockholder  who  votes  to  reduce  the  capital 
stock,  when  such  reduction  will  make  the  corporation  insolv- 
ent, renders  himself  liable  for  all  debts  then  due,  and  directors 


AND    CORPORATION   LAw  387 

who  vote  dividends  when  a  corporation  is'  insolvent,  or  when 
such  dividend  will  make  it  insolvent,  are  liable  for  all  debts 
then  due,  the  directors  voting  against  such  dividends  are  ex- 
empt from  this  liability.  If  application  is  made  to  the  State 
legislature  for  a  charter  to  do  business  chiefly  outside  the  State, 
a  fee  of  $ioo  must  be  paid  into  the  State  Treasury,  and  before 
commencing  business  a  franchise  tax  must  be  paid,  the  amount 
of  which  may  range  from  $ioo  to  $5000,  to  be  fixed  by  the 
State  Board  of  Equalization,  and  a  like  sum  upon  increasing 
its  capital  stock. 

1 174  (a).  The  legal  and  contract  rate  of  interest  is  6%. 
Usury  is  not  penalized.    No  grace  allowed. 

District  of  Columbia. 

1 175.  The  laws  of  the  District  are  said  to  be  the  queerest 
in  the  world.  Under  the  general  corporation  laws  from  three 
to  twenty  persons  may  organize  a  corporation,  the  number  de- 
pending on  the  class  of  corporation,  of  which  there  are  seven 
classes'.  The  certificate  of  incorporation,  duly  verified,  must 
be  filed  with  the  Recorder  of  Deeds  within  thirty  days  after 
the  final  instalment  is  paid.  Manufacturing  and  mercantile 
corporations  belong  to  the  fourth  class.  Until  the  entire  au- 
thorized capital  shall  have  been  paid,  the  stockholders  in  this 
class  of  corporation  are  jointly  and  severally  liable  for  an 
amount  equal  to  the  stock  they  hold,  for  all  corporate  debts. 
The  law  requires  the  making  of  annual  reports'.  These  reports 
must  state  the  authorized  and  paid-up  capital  and  the  amount 
of  the  corporation's  debts. 

1 175  (a).  The  legal  rate  of  interest  is  6%;  contract  rate 
10%.     Penalty  for  usury  forfeiture  of  all  the  interest. 

Florida. 

1 176.  Corporations  are  usually  credited  under  the  general 
corporation  law.  Three  or  more  persons  may  form  a  corpora- 
tion. After  filing  articles  with  the  Secretary  of  State  the  in- 
corporators must  publish  a  notice  of  their  intention  to  apply 
for  a  charter  once  a  week  for  four  weeks  in  a  local  paper,  set- 
ting forth  the  purpose  of  the  corporation,  etc.  The  fee  for 
fiHng  is  $2.00  per  thousand,  with  a  minimum  fee  of  $5.00  and  a 
maximum  of  $250.  Stockholders  are  liable  for  only  unpaid 
balance  of  subscription. 

Foreign  corporations  are  entitled  to  all  the  privileges  of 
domestic  corporations,  but  are  required  to  have  a  resident 
agent  on  whom  process  may  be  served. 


388  CORPORATION   ACCOUNTING 

1 176  (a).  The  legal  rate  of  interest  is  8%;  by  contract 
10%.     Penalty  for  usury  being  forfeiture  of  interest. 

Georgia. 

1 177.  The  power  to  create  private  corporations  (outside 
of  Banking,  Insurance,  Railroad,  Canal,  Navigation,  Express 
and  Telegraph  Companies)  is  vested  in  the  Superior  Courts 
of  the  several  counties.  Charters  are  granted  on  petition  set- 
ting forth  the  objects  etc.  Charters  are  limited  to  20  years. 
Petition  must  be  published  once  a  week  for  one  month.  Ten 
per  cent  of  the  Capital  must  be  paid  in  before  charter  becomes 
operative. 

Foreign  corporations  are  recognized  in  Georgia  courts, 
only  by  comity. 

1 177  (a).  The  legal  rate  of  interest  is  7%;  by  contract 
8%.  The  penalty  for  usury  is  forfeiture  of  amount  in  excess 
of  7%. 

Idaho. 

1 178.  It  requires  the  association  of  five  or  more  persons, 
one  of  whom  must  be  a  bona  fide  resident  of  the  state,  to  form 
a  corporation.  Corporations  are  chartered  for  a  period  not 
to  exceed  50  years.  Individual  liability  for  corporate  debts  is 
limited  to  the  full  payment  of  subscription  and  no  more. 

Foreign  corporations  may  enjoy  all  the  rights  and  privi- 
leges of  domestic  corporations  by  filing  copy  of  Articles'  of 
Incorporation  in  the  office  of  the  Secretary  of  State  and  also 
with  the  clerk  of  the  district  court  where  their  principle  busi- 
ness is  located  and  by  designating  some  person,  resident  in 
such  place,  on  whom  process  may  be  served. 

1178  (a).  The  legal  rate  of  interest  is  7%;  contract  rate 
12%.  For  usury  the  lender  forfeits  the  interest  and  the  bor- 
rower pays  10%  to  a  school  fund. 

Illinois. 

1 179.  Business  corporations  are  formed  under  the  general 
corporation  act.  From  three  to  seven  persons  may  join  in 
signing  articles  of  association.  The  duration  of  incorporation 
shall  not  exceed  ninety-nine  years.  The  Secretary  of  State 
first  issues  a  license  to  open  subscription  books,  and  when  the 
subscription  is  complete  and  an  election  of  officers  takes  place 
he  issues  a  complete  organization  certificate.  Stockholders'  are 
liable  for  any  unpaid  balance  on  their  subscriptions  and  they 
are  not  relieved  of  this  by  transfer,  but  are  held  jointly  liable 


AND    CORPORATION    LAW  389- 

with  the  transferee  until  the  stock  is  fully  paid.  Shares  must 
not  be  for  less  than  $10.00  nor  more  than  $100.  If  indebted- 
ness exceeds  the  capital  stock  the  directors  and  officers  as- 
senting to  this  are  personally  liable  to  creditors.  Annual  re- 
ports must  be  made  to  the  Secretary  of  State. 

Foeign  corporations  must  designate  a  resident  agent  upon 
whom  legal  service  of  process  may  be  made.  They  are  subject 
to  all  the  liabilities'  and  restrictions  of  domestic  corporations 
and  may  have  no  greater  powers,  nor  can  they  engage  in  any 
business  not  authorized  by  their  charters. 

1179  (a).  The  legal  rate  of  interest  is  5%;  contract  rate- 
7%  and  the  penalty  for  usury  is  forfeiture  of  entire  interest. 

Indiana. 

1 180.  Parties  wishing  to  form  a  corporation  in  this  State 
may,  by  filing  articles  with  the  Secretary  of  State,  or  in  some 
cases  with  the  Recorder  of  the  county  in  which  it  is  desired 
to  have  the  pincipal  place  of  business,  organize  under  the  gen- 
eral laws  of  Indiana.  There  is  no  fixed  or  uniform  liability  in 
this  State,  the  nature  of  the  business  or  other  circumstances 
determines  the  liability  of  stockholders  and  there  are  some  cor- 
porations where  the  liability  of  stockholders  is  not  yet  fixed  by 
statute.  Corporations  are  divided  into  three  main  divisions, 
and  the  liability  varies  from  a  single  liability,  to  a  single  lia- 
bility plus  liability  for  wages  due,  to  a  double  liability. 

The  agent  of  a  foreign  corporation  must  file  with  the 
County  Clerk  his  power  of  attorney  or  other  evidence  of  au- 
thority. 

1 180  (a).  The  legal  rate  of  interest  is  6%;  contract  rate 
8%.    The  penalty  for  usury  is  forfeiture  of  excess  interest. 

Indian  Territory. 

1 181.  This  territory  has  adopted  that  portion  of  the  laws 
of  Arkansas  which  relate  to  corporations.  Vide  paragraph 
1 172. 

The  legal  rate  of  interest  is  6%  ;  by  contract  8%.  Penalty 
for  usury  forfeiture  of  principle  and  interest.  Grace  on  all  but 
demand  drafts. 

Iowa. 

1 182.  All  corporations  are  organized  under  general  laws. 
The  constitution  prohibits  the  granting  of  special  charters. 
Any  number  of  persons  may  associate  themselves  together  for 
the  purpose  of  forming  a  corporation.     Corporations  may  en- 


390  CORPORATION   ACCOUNTING 

gage  in  any  lawful  business.  The  articles  of  incorporation 
must  fix  the  highest  indebtedness  which  the  directors  may 
incur  and  this  must  not  exceed  two-thirds  of  the  capital  stock, 
except  in  case  of  Insurance  Companies,  they  also  fix  the  ex- 
tent to  which  the  private  property  of  stockholders  shall  be 
subject  for  corporate  debts,  but  in  no  case  can  the  liability  be 
less  than  the  balance  due  on  subscriptions.  Tansfers  to  es- 
cape this  liability  do  not  relieve,  and  executions  may  be  levied 
on  private  property  for  balance  due  on  transferred  stock. 

1 182  (a).  The  legal  rate  of  interest  is  6%;  contract  rate 
8%.   The  penalty  for  usury  is  forfeiture  of  interest  and  costs'. 

Kansas. 

1 183.  Five  or  more  persons  may  associate  themselves  to- 
gether for  the  purpose  of  forming  a  corporation,  at  least  three 
of  these  must  be  citizens  of  the  State.  The  application  must 
be  filed  with  a  Charter  Board  composed  of  the  Attorney  Gen- 
eral, Secretary  of  State  and  Bank  Commissioner.  The  appli- 
cation fee  is  $25.  The  Board  examines  into  the  application 
and  decides  whether  to  allow  or  reject  it.  In  addition  to  the 
application  fee,  there  is  a  charter  fee  ranging  with  the  amount 
of  the  Capital  Stock.  Annual  statements  must  be  made  each 
year  to  the  Secretary  of  State,  and  the  Secretary  of  State  may 
demand  supplemental  statements  at  any  time.  Change  of 
ownership  of  stock  must  also  be  recorded  in  the  office  of  the 
State  Secretary.  Corporation  stock  is*  liable  for  corporate 
debts  and  is  regarded  as  personal  property.  Liability  to  cred- 
itors can  now  only  be  enforced  through  a  receiver.  The  credit- 
ors can  not  maintain  action.  Corporation  may  increase  their 
stock  by  vote  of  the  stockholders,  but  such  increase  must  be 
made  by  actual  bona-fide  cash  subscriptions  to  the  amount  of 
such  increase.    No  water  in  Kansas  Stock. 

1 183  (a).  The  legal  rate  of  interest  is  6%;  contract  rate 
10%.  Penalty  for  usury  forfeiture  of  excess  interest  and  an 
amount  equal  to  that  contracted  for  in  excess  of  10%  to  be  de- 
ducted from  the  principle. 

Kentucky. 

1 184.  There  is  no  restriction  as  to  the  line  of  business  in 
which  corporations  may  engage  in  in  this  State.  Individuals 
may  associate  themselves  for  the  purpose  of  engaging  in  any 
lawful  business  and  form  a  corporation  under  the  general  laws. 
Stockholders  are  liable  for  corporate  debts  to  an  amount  equal 
to  that  which  they  owe  the  corporation  on  the  stock  they  have 


AND    CORPORATION    LAW  391; 

subscribed  for,  and  stockholders  in  corporations  not  organized 
for  educational,  religious,  charitable,  or  benevolent  purposes,, 
or  for  the  purpose  of  building,  constructing  or  operating  turn- 
pikes or  bridges',  lines  of  railroad,  telegraph  or  telephane,  or 
developing  or  improving  lands,  mines  or  waterways,  or  con- 
structing or  operating  water,  gas  or  electric  plants,  or  operat- 
ing for  petroleum,  natural  gas  or  salt  water,  are  indiivdually 
responsible  equally  and  ratably,  and  not  one  for  the  other,  for 
all  contracts  and  liabilities  of  such  corporations,  to  tne  extent 
of  the  amount  of  their  stock  at  par  value,  in  addition  to  the 
amount  of  such  stock. 

Foreign  corporations  may  not  enjoy  greater  privileges  than 
those  given  to  domestic  corporations  in  the  same  class. 

1 184  (a).  The  legal  and  contract  rate  of  interest  is  6%, 
and  interest  in  excess  of  this  can  not  be  recovered  at  law.  No^ 
grace. 

Louisiana. 

1 185.  The  Civil  Code  of  this  State  specifies  a  list  of  en- 
terprises, for  the  carrying  on  of  which  corporations  may  be 
formed  by  any  six  or  more  persons.  The  number  necessary 
to  incorporate  a  banking  institution  shall  not  be  less  than  five^, 
and  there  are  certain  other  lines  of  business  such  as  mechani- 
cal, mining  and  manufacturing  which  may  be  incorporated  by 
three  persons.  For  this  last  schedule  the  capital  stock  must 
be  between  $5,000  and  $1,000,000.  The  manufacture  or  dis- 
tilling of  intoxicating  liquors  is  excepted  from  this  last  list. 
The  liability  of  stockholders  is  limited  to  the  amount  due  on 
their  subscriptions.  Charters  must  state  among  other  things 
the  time  and  manner  of  payment  on  stock  subscribed,  and  the 
mode  of  liquidation  at  termination  of  charter.  Charters  may 
also  contain  agreements  for  consolidation,  dissolution  or  liqui- 
dation. There  is  also  a  "limited  corporation"  law  in  this  State 
under  which  corporations  may  be  formed  to  carry  on  any  kind 
of  lawful  business',  except  stock  jobbing.  These  corporations 
may  be  formed  by  three  or  more  persons,  must  have  a  capital 
stock  of  not  less  than  $5,000  and  must  on  every  occasion  use 
the  word  "limited"  after  their  name.  The  liability  is  limited 
to  the  amount  of  the  subscriptions.  Any  corporation  making 
a  fictitious  issue  of  stock  shall  forfeit  its  charter. 

Foreign  corporations  (excepting  mercantile)  must  file  with 
the  Secretary  of  State  a  declaration  of  domicile  and  appoint 
a  resident  agent  on  whom  process  may  be  served. 

1 185  (a).  The  legal  rate  of  interest  is  5%;  contract  rate 
8%.    Penalty  for  usury  forfeiture  of  entire  interest.    No  grace.. 


.392  CORPORATION   ACCOUNTli\G 

Maine. 

1186.  In  1901  the  State  of  Maine  placed  upon  its  Statute 
books  a  set  of  corporation  laws  that  are  not  only  broad  and 
liberal  but  in  many  respects  singularly  unique.  Here  are  some 
of  the  features,  not  a  few  of  which  are  dangerous  : 

Three  persons  may  form  a  corporation  under  the  general 
law.  Corporations  may  be  chartered  with  a  minimum  capital 
of  $1000.  Corporations  may  commence  business  and  continue 
with  no  capital  paid  in.  Stockholders  liability  is  limited  to 
the  par  value  of  the  stock.  Stock  may  be  paid  for  in  property 
or  services  and,  as  in  New  Jersey,  the  judgment  of  the  direct- 
ors is  conclusive  in  determining  the  value  of  such  property  or 
service ;  and  stock  so  issued  is  fully  paid  and  free  of  liability. 
Maine  corporations  are  not  required  to  file  any  kind  of  state- 
ment. They  are  exempt  from  tax  while  franchise  is  unused. 
Corporate  organization  can  be  effected  in  three  days  without 
any  of  the  incorporators  coming  to  the  state,  and  not  any  di- 
rectors or  officers  with  the  exception  of  a  clerk  need  be  a  resi- 
dent of  the  State,  and  inasmuch  as  meetings  can  be  held  by 
proxy,  not  any  of  the  stockholders  are  ever  required  to  come 
to  Maine.  Meetings  may  be  held  outside  of  the  State  and 
business  may  be  conducted  and  offices  maintained  in  any  part 
of  the  world.  A  married  woman  may  be  a  stockholder,  di- 
rector, or  officer.  Two  or  more  classes  of  directors  may  be 
chosen  and  elected  for  terms  longer  than  one  year.  Corporate 
powers  are  practically  unlimited;  consolidations  or  mergers 
may  be  formed  and  holding  companies  organized.  In  most 
States  corporate  powers  are  limited  to  those  expressly  granted 
or  implied,  but  in  Maine,  corporations  can  not  only  do  what 
the  Statute  expressly  grants,  but  also  whatever  it  does  not 
forbid. 

Foreign  Corporations  may  do  business  in  this  State.  The} 
may  be  subject  to  suit  and  attachment. 

1 186  (a).  The  legal  rate  of  interest  is  6%;  contract  rate 
any  rate  agreed  upon. 

Maryland. 

1 187.  Corporations  are  usually  formed  under  the  general 
corporation  Act  by  the  association  of  five  or  more  persons, 
citizens  of  the  United  States,  and  a  majority  of  whom  must 
be  citizens  of  this  State.  Stockholders  are  liable  to  the  amount 
of  their  subscriptions.  The  certificate  of  incorporation  must 
be  approved  by  a  judge  of  the  Superior  Court  or  Circuit  Court. 
Officers  assenting  to  a  loan  made  to  a  stockholder  are  liable 


AND    CORPORATION   LAW  393 

for  double  the  loss  in  case  of  insolvency.    This  does  not  apply 
to  Building  and  Loan  or  money  lending  corporations. 

Foreign  corporations  must  file  certified  copy  of  charter 
with  the  Secretary  of  State  and  name  a  resident  agent  on 
whom  legal  service  can  be  made. 

1187  (a).  The  legal  and  contract  interest  is'  6%.  For- 
feiture of  excess  interest  is  the  penalty  for  usury. 

Massachusetts. 

1 188.  Three  or  more  persons  may  form  a  corporation  un- 
der the  general  laws.  The  certificate  of  incorporation  must 
be  approved  by  the  commissioner  of  Corporations  who  files 
the  same  with  the  Secretary  of  State,  and  the  latter  issues  the 
charter.  Shares  of  stock  may  range  from  $5  to  $100.  Stock 
may  be  paid  for  in  money  or  property — real  or  personal — but 
the  president  and  treasurer  and  a  majority  of  the  directors 
must  make  a  sworn  statement  that  the  valuation  is  fair  and 
reasonable,  and  this  statement  must  be  approved  by  the  Com- 
missioner of  Corporations  and  filed  in  the  office  of  the  Secre- 
tary of  the  Commonwealth.  Stockholders  who  have  paid  in 
full  for  their  stock  are  not  further  liable  for  corporate  debts. 
Corporations  may  be  dissolved  on  petition  of  a  majority  of  the 
stockholders  to  the  Superior  Court.  A  Corporation  has  the 
common  law  right  of  winding  up  its  affairs. 

1 188  (a).  The  legal  rate  of  interest  is  6%;  by  contract 
any  rate. 

Michigan. 

1 189.  In  this  State  corporations  are  formed  under  general 
laws.  Manufacturing  and  mercantile  corporations  are  formed 
under  a  law  known  as  the  manufacturing  act.  These  corpor- 
ations are  required  to  file  with  the  Secretary  of  State  in  Jan- 
uary or  February  of  each  year  a  duplicate  statement  of  their 
condition,  setting  forth  the  actual  capital  paid  in,  the  resources 
and  liabilities,  the  names  of  stockholders  and  number  of  shares 
held  by  each,  etc.  The  Secretary  of  State  furnishes  Dlanks  on 
which  these  reports  must  be  made,  and  such  reports  must  be 
sworn  to  by  the  secretary  and  signed  by  a  majority  of  the 
directors.  A  penalty  of  $25  is  imposed  for  failure  to  make  re- 
port and  an  additional  penalty  of  $5  per  day  for  each  secular 
day  after  the  first  of  March  until  report  is  made. 

Other  classes  of  corporations,  while  required  to  make  re- 
ports, are  not  obliged  to  make  as  complete  reports'  as  the  fore- 
going.   The  liability  of  stockholders  is  limited  to  the  amount 


394  CORPORATION   ACCOUNTING 

of  their  subscriptions  excepting  for  labor  performed  for  the 
corporation,  in  which  case  there  is  an  additional  personal  Ha- 
bility.  Minority  stockholders  may  combine  their  votes  so  as 
to  elect  one  director.  Corporations  must  at  time  of  organiz- 
ing pay  to  the  Secretary  of  State  a  franchise  fee  or  tax  of  half 
a  mill  on  every  dollar  of  their  capital;  that  is,  one  cent  on 
every  $20,  and  no  contract  made  by  a  corporation  shall  be 
valid  until  this  requirement  of  the  statute  shall  have  bee.- 
complied  with. 

The  same  provision  applies  to  foreign  corporations  seeking 
entrance  into  this  State,  and  such  corporations'  upon  compli- 
ance with  the  statutes  shall  have  the  same  rights,  privileges,, 
prerogatives  and  responsibilities  as  domestic  corporations. 

1189  (a).  The  legal  rate  of  interest  is  5%;  contract  rate 
7%.    Penalty  for  usury  forfeiture  of  all  interest. 

Minnesota. 

1 190.  Three  persons  may  form  a  corporation  in  Minne- 
sota, excepting  corporations  authorized  to  take  private  prop- 
erty for  public  use,  in  which  case  the  number  of  incorporators 
must  not  be  less  than  five.  Stockholders  are  liable  for  the  par 
value  of  the  stock  which  they  hold  excepting  manufacturing 
and  mechanical  corporations).  Owners  of  bank  stock  are  liable 
for  double  the  amount  of  their  stock.  Persons  holding  such 
stock  as  collateral  security  are  equally  liable  and  no  owner  or 
holder  of  bank  stock  is  released  from  liability  for  one  year  after 
the  sale  or  transfer  of  his  stock,  provided  the  bank  goes  into 
insolvency  within  the  period  specified. 

Foreign  corporations  must  file  certified  copy  of  charter  or 
Articles  of  Incorporation  and  must  maintain  an  office  and  have 
a  resident  agent  at  such  office. 

1 190  (a).  The  legal  rate  of  interest  is  6%;  contract  rate 
10%.    The  penalty  for  usury  is  forfeiture  of  entire  interest. 

Mississippi. 

1 191.  Corporations  are  formed  under  general  laws,  but 
with  the  exception  of  railroads  and  insurance  companies  they 
may  be  specially  granted  a  charter  by  the  Governor  on  ad- 
vice of  the  Attorney  General.  Stockholders  are  liable  for  only 
the  balance  unpaid. on  their  subscriptions.  Directors  are  liable 
for  debts  incurred  in  excess  of  the  capital  stock. 

Foreign  corporations  are  not  required  to  file  copy  of  char- 
ter. They  may  do  business  in  conformity  with  the  State  laws 
governing  domestic  corporations. 


AND    CORPORATION    LAW  "  395 

1 191  (a).  The  legal  rate  of  interest  is  6%;  contract  rate 
is  10%.    Penalty  for  usury,  forfeiture  of  all  interest. 

Missouri. 

1 192.  Five  or  more  persons'  may  form  a  corporation.  All 
corporations  are  created  under  general  laws,  none  under  pri- 
vate charter.  The  business  of  the  corporation  shall  be  limited 
to  the  charter  provisions.  Every  corporation  must  have  at 
least  three  resident  directors.  The  minimum  capital  permitted 
is  $2000  and  the  maximum  $10,000,000.  Stockholders  are  liable 
for  only  the  par  value  of  their  subscriptions.  Stock  can  be 
issued  only  for  money,  property  or  service  actually  performed. 
The  State  tax  is  $50  for  the  first  $50,000  capital  or  less,  and 
$5  for  every  additional  $10,000.  In  addition  there  is  a  tax  of 
twenty-five  cents  on  every  $1000  of  capital  stock,  which  goes 
to  the  school  fund.  Domestic  corporations,  excepting  rail- 
roads and  insurance,  are  required  to  make  an  annual  report  to 
the  Secretary  of  State.  Preferred  stock  may  be  issued  with 
the  consent  of  the  stockholders. 

Foreign  corporations  must  maintain  an  office  in  the  State 
and  appoint  a  resident  agent  on  whom  process  may  be  served. 

1 192  (a).  The  legal  rate  of  interest  is  6%;  contract  rate 
8%.    Penalty  for  usury  forfeiture  of  all  interest  with  costs. 

Montana. 

1 193.  The  number  of  persons  who  may  form  a  corporation 
in  Montana  shall  not  be  less  than  three  nor  more  than  nine. 
A  certificate  of  incorporation,  reciting  the  objects  of  the  cor- 
poration, amount  of  capital  stock,  proposed  term  of  existtence, 
etc.,  must  be  filed  with  the  County  Clerk  of  the  county  where 
the  principle  place  of  business  is  located,  and  a  duplicate  copy 
with  the  Secretary  of  State.  Twenty  years  is  the  limit  of  cor- 
porate existence.  Stockholders  are  personally  liable  for  only 
the  balance  due  on  their  subscriptions'.  The  debts  of  a  cor- 
poration must  never  exceed  the  amount  of  the  capital  stock; 
if  they  do,  the  directors  are  jointly  and  severally  liable  for  the 
amount  of  such  excess ;  that  is,  such  of  the  directors  as  know- 
ingly assent  to  it.  The  articles  of  incorporation  may  provide 
for  assessing  the  stock,  otherwise  it  is  non-assessible. 

Corporations  are  required,  annually,  within  twenty  days 
after  the  first  of  September,  to  publish  in  some  newspaper 
printed  nearest  the  place  Avhere  the  business  of  the  company 
is  carried  on,  a  verified  report  stating  the  amount  of  the  cap- 
ital stock,  the  proportion  paid  in,  and  the  amount  of  the  exist- 


396  -       CORPORATION   ACCOUNTING 

ing  debts  of  the  company ;  and  file  the  same  in  the  office  of  the 
clerk  of  the  county  where  the  business  of  the  company  is  car- 
ried on.  P'ailure  to  do  so  renders  all  the  trustees  of  the  com- 
pany jointly  and  severally  liable  for  all  debts  of  the  company 
then  existing,  and  for  all  that  may  be  contracted  before  such 
report  shall  be  made ;  but  if  the  board  shall  cause  a  report  to 
be  filed  in  the  office  of  the  County  Clerk,  although  it  is  not 
published,  the  liability  ceases. 

The  name  of  every  corporation  must  indicate  the  nature  of 
its  business,  and  the  last  word  of  such  name  must  be  either 
"Company"  or  ''Corporation." 

There  is  special  legislation  affecting  foreign  corporations 
doing  business  in  this  State. 

1 193  (a).  The  legal  rate  of  interest  is  8%;  but  contract 
any  rate. 

Nebraska. 

1 194.  Any  number  of  persons  may  form  a  corporation 
for  the  transaction  of  any  lawful  business.  All  corporations 
are  organized  under  a  general  statute.  Notice  of  incorpora- 
tion must  be  published,  stating  nature  of  business,  capital 
stock  and  time  and  condition  of  payments,  etc.  Statement  of 
liabilities  must  be  published  annually.  Stockholders  are  not 
liable  beyond  the  par  value  of  the  stock  for  which  they  have 
subscribed. 

Foreign  corporations  may  become  domestic  corporations 
by  complying  with  certain  statutory  requirements. 

1 1949  (a).  The  legal  rate  of  interest  is  7% ;  contract  rate 
10%.    Penalty  for  usury  forfeiture  of  all  interest  and  costs. 

:   ;  Nevada. 

1 195.  Three  or  more  persons  may  form  a  corporation  for 
the  transaction  of  any  lawful  business,  under  the  General  Cor- 
poration Act.  There  is  no  personal  liability  for  corporate 
debts.  Stockholders  and  directors  meetings  may  be  held  out- 
side the  State,  if  desired ;  provided  an  office  and  resident  agent 
is  maintained  within  the  State.  Consolidations  and  mergers 
may  be  formed.  Corporate  existence  may  be  made  perpetual. 
Non-assessable  stock  may  be  issued.  There  is  no  franchise 
tax  in  Nevada.  Votes  may  be  cast  by  proxy  and  cumulative 
voting  is  permitted.  All  stock  is  personal  property.  Stock 
may  be  issued  for  labor  or  property,  and  when  so  issued  is 
paid-up  stock.  Two  or  more  kinds  of  stock  may  be  issued. 
Preferred  stock  may  be  converted  into  bonds,  or  bonds  may 


AND   CORPORATION   LAW  397 

be  made  convertible  into  common  stock.     Corporation  may 
hold  stock  of  other  corporations. 

1 195  (a).  The  legal  rate  of  interest  is  7%;  but  contract 
any  rate. 

New  Hampshire. 

1 196.  Corporations  may  be  formed  under  general  laws. 
Stockholders  are  liable  to  the  corporation  and  its  creditors  up 
to  the  par  value  of  the  stock;  but  there  is  no  further  individual 
liability  for  corporate  debts  provided  the  Statute  has  been 
complied  with. 

Foreign  corporations  may  do  business  same  as  domestic 
corporations. 

1 196  (a).  The  legal  and  contract  rate  of  interest  is  6% 
and  the  penalty  for  usury  is  forfeiture  of  three  times  the 
amount  paid  over  the  legal  rate. 

New  Mexico. 

1 197.  Three  or  more  persons  may  associate  themselves 
for  the  purpose  of  forming  a  corporation.  They  may  incor- 
porate under  general  laws  for  a  period  of  50  years.  There 
must  not  be  less  than  three  directors  in  any  company,  and  at 
least  two  of  these  must  be  citizens'  of  the  United  States,  and 
one  a  resident  of  New  Mexico.  Stock  is  regarded  as"  personal 
property.  There  is  no  personal  liability  for  corporate  debts 
unless  such  debts  exceed  in  amount  the  capital  stock.  Special 
regulations  govern  railroad  corporations. 

Foreign  corporations  must  file  articles'  of  incorporation  and 
designate  a  resident  agent. 

1197  (a).  The  legal  rate  of  interest  is  6%;  by  contract 
12%.  The  penalty  for  usury  is  forfeiture  of  twice  the  excess 
and  a  fine  of  from  $25  to  $100. 

New  York. 

1 198.  Corporations  are  created  under  general  laws.  Three 
or  more  persons  may  incorporate.  The  corporators  must  be 
adults,  and  two-thirds  must  be  citizens'  of  the  United  States, 
and  one  a  resident  of  the  State  of  New  York.  Two  directors 
must  reside  in  the  State.  Stock  may  be  issued  only  for  money 
or  property  actually  received.  Stockholders  are  liable  to  cred- 
itors for  corporate  debts  contracted  while  they  were  stock- 
holders, to  an  amount  equal  to  the  balance  remaining  unpaid 
on  their  subscriptions.  At  the  time  of  subscribing,  stockhold- 
ers must  pay  10%  of  their  subscription  in  cash.    At  least  two- 


398  CORPOEATION   ACCOUI^TING 

thirds  vote  of  the  stock  in  interest  is  necessary  to  create  a 
mortgage  indebtedness,  and  this  must  not  exceed  the  total 
paid-up  stock,  or  two-thirds  the  value  of  the  corporate  prop- 
erty. The  term  of  corporate  existence  is  50  years,  but  cor- 
porate existence  may  be  extended  for  a  like  period  on  the  con- 
sent and  application  of  stockholders  representing  two-thirds 
of  the  stock.  Directors  are  personally  liable  for  unauthorized 
dividends,  unauthorized  debts,  an  over-issue  of  bonds,  or  loans 
to  stockholders.  In  case  of  insolvency,  the  directors  shall  act 
as  trustees  for  creditors  and  stockholders,  unless  a  receiver  is 
appointed. 

Foreign  corporations  may  obtain  permission  to  do  busi- 
ness in  this  State. 

1 198  (a).  The  legal  and  contract  rate  of  interest  is  6%, 
Usury  voids  a  contract  and  is  a  misdemeanor. 

North  Carolina. 

1 199.  Corporations  are  formed  under  a  general  Statute  or 
created  by  special  Act.  The  liability  of  stockholders  depends 
upon  the  provisions  of  the  Articles  of  Incorporation.  Unless 
the  articles  so  provide  there  is  no  personal  liability  on  the  part 
of  the  stockholder.  Corporations  may  purchase,  hold  and  dis- 
pose of  the  stocks  and  bonds  of  other  corporations.  Cor- 
poration shall  be  post-existent  for  three  years  for  the  purpose 
of  winding  up  their  business. 

Foreign  corporations  must  file  certified  copy  of  charter  or 
Articles  of  Incorporation,  and  have  an  ofiice  or  authorized 
agent  in  the  State. 

1 199  (a).     The  legal  and  contract  rate  of  interest  is  6%. 

North  Dakota. 

1200.  Three  or  more  persons  may  form  a  corporation  for 
the  purpose  of  carrying  on  any  lawful  business.  The  amount 
paid  upon  stock  must  be  endorsed  on  the  certificate  by  the 
Secretary,  and  when  it  is  fully  paid  it  must  be  endorsed  ''fully 
paid  up."  Stock  may  be  issued  for  money,  propetry  or  labor, 
at  its  true  money  value.  No  note  or  other  obligation  can  be 
accepted  in  payment  of  stock.  Stockholders  are  personally 
liable  for  corporate  debts  to  the  amount  of  their  unpaid  sub- 
scriptions. Dividends  can  be  paid  only  out  of  surplus,  and 
directors  can  not  create  debts  in  excess  of  the  subscribed  cap- 
ital stock.  It  requires  a  vote  of  two-thirds  the  entire  capital 
stock  to  create  a  bonded  indebtedness.  The  same  vote  is  re- 
quired to  increase  or  decrease  the  capital  stock. 


AND   CORPORATIOIS    LAW  399 

Ohio. 

1201.  Five  or  more  persons  may  form  a  corporation  un- 
<ler  general  laws.  A  majority  of  these  must  be  citizens  of 
Ohio.  Ten  per  cent  is  payable  at  time  of  subscribing.  The 
balance  may  be  paid  in  instalments  as  required  by  the  direct- 
ors. Stockholders  are  liable  for  the  unpaid  balance  of  their 
subscriptions.  There  must  not  be  less  than  five  nor  more  than 
fifteen  directors.  A  majority  of  the  Board  must  be  citizens 
of  the  State  and  all  executive  officers  must  be  stockholders. 

1201  (a).  The  legal  rate  of  interest  is  6%;  contract  rate 
S%.    The  penalty  for  usury  is  forfeiture  of  excess  interest. 

Oklahoma. 

1 202.  Three  or  more  persons  may  form  a  corporation  for 
industrial  purposes.  One-third  of  the  officers  must  be  resi- 
dents of  Oklahoma.  A  corporation  may  purchase,  out  of  its 
surplus,  and  hold  its  own  stock  with  the  unanimous  consent, 
in  writing,  of  all  of  the  stockholders. 

Foreign  corporations  must  file  certified  copies  of  articles 
of  incorporation. 

1202  (a).  The  legal  rate  of  interest  is  7%;  ocntract  rate 
12%.    The  penalty  for  usury  is  forfeiture  of  interest. 

Oregon. 

1203.  Corporations  are  formed  under  general  law  by  the 
association  of  three  or  more  persons.  After  one-half  of  the 
stock  is  subscribed,  the  stockholders  meet  and  elect  officers. 
Directors  must  be  stockholders  and  residents  of  Oregon. 

Foreign  corporations  may  do  business  on  the  same  terms 
as  domestic  corporations  by  complying  with  the  statutes. 

1203  (a).  The  legal  rate  of  interest  is  6%;  contract  rate 
10%.  The  penalty  for  usury  is  forfeiture  of  principle  and  in- 
terest. 

Pennsylvania. 

1204.  Three  persons'  may  unite  in  forming  a  corporation, 
one  of  these  must  be  a  resident  of  the  State.  The  charter  may 
provide  for  perpetual  existence.  At  the  time  of  organization 
10%  of  the  authorized  capital  must  be  paid  in  cash,  but  not 
necessarily  ten  per  cent  of  each  subscription.  The  remaining 
90%  may  be  paid  in  property.  Notice  of  intention  to  incor- 
porate must  be  advertised  for  three  weeks.  When  stock  has 
been  fully  paid  there  is  no  further  liability  attaching  to  stock- 
holders, except  for  work  and  material  furnished  and  in  this 


400  CORPORATION   ACCOUNTING 

I200  (a).  The  legal  rate  of  interest  is  7%;  by  contract 
12%.  Forfeiture  of  all  interest  is  the  penalty  imposed  for 
usury. 

case  the  liability  is  proportionate  to  the  stock  held  by  each. 
Nearly  all  corporations  for  profit  must  pay  a  bonus  of  one- 
third  per  cent  on  the  amount  of  their  capital  stock  and  all 
such  corporations,  excepting  banks,  savings  institutions  and 
foreign  insurance  companies,  must  make  an  annual  report  to 
the  Auditor  General,  and  pay  an  annual  tax  of  five  mills'  o^ 
the  actual  value  of  the  capital  stock  as  appraised  by  the  Audi- 
tor General  and  State  Treasurer.  Voting  may  be  done  by 
proxy,  and  one  person  may  act  as  proxy  for  any  number;  but 
to  be  valid,  a  proxy  must  be  executed  v^ithin  two  months 
prior  to  the  meeting  at  which  it  is  to  be  used. 

Foreign  corporations  must  establish  an  office  within  the 
State  and  appoint  an  agent  before  doing  business.  Foreign 
corporations,  in  which  three  or  more  stockholders  are  citizens 
of  Pennsylvania,  may  become  domestic  corporations  by  mak- 
ing application  to  the  Governor  and  renouncing  their  original 
charter. 

1204  (a).  The  legal  and  contract  rate  of  interest  is  6%. 
Commission  merchants  and  agents  may  make  contracts  with 
people  outside  of  the  State  for  7%. 

Rhode  Island. 

1205.  Three  or  more  persons  of  legal  age  can  form  a  cor- 
poration. Preferred  and  common  stock  can  be  issued,  the 
amount  of  each  and  the  preference  to  be  stated  in  Articles  of 
Incorporation.  If  a  corporation  is  formed  to  carry  on  busi- 
ness out  of  the  State  one  of  the  directors  must  be  a  resident 
of  the  State.  The  stockholders  are  jointly  and  severally  liable 
for  all  debts  and  contracts  until  the  whole  of  the  capital  stock 
shall  have  been  paid ;  this  liability  is  limited  to  the  par  value 
of  the  stock  of  each  shareholder.  There  is  also  an  additional 
liability  for  failure  to  file  an  annual  statement  of  assets  and 
liabilities  on  or  before  February  15th  of  each  year. 

Foreign  corporations  must  appoint  an  attorney  within  the 
State  to  accept  service  of  process  and  garnishment. 

1205  (a).  The  legal  rate  of  interest  is  6%;  by  contract, 
any  rate. 

South  Carolina. 

1206.  Two  or  more  persons  may  form  an  ordinary  busi- 
ness corporation  under  the  general  corporation  act.  Subscrip- 
tion books  may  be  opened  on  filing  petition  with  the  Secretary 


AND    COEPORATION    LAW  401 

of  State,  the  payment  of  a  fee  of  $3.00  and  the  publication  of 
a  notice  for  a  period  not  exceeding  10  days.  Fifty  per  cent 
of  the  proposed  capital  must  be  subscribed  before  a  corpora- 
tion can  be  organized.  Twenty  per  cent  of  the  subscribed 
capital  must  be  paid  when  organization  is  completed.  There 
is  no  stockholders  liability  except  in  the  case  of  banking  cor- 
porations. 

Foreig  ncorporations  must  designate  some  principle  place 
,of  business  within  the  State  and  also  appoint  a  resident  agent. 

1006  (a).  The  legal  rate  of  interest  is  7%;  contract  rate 
is  8%.     Forfeiture  of  all  interest  is  the  penalty  for  usury. 

South  Dakota. 

1207.  Three  or  more  persons  may  form  a  corporation. 
At  least  one-third  of  the  corporators  must  be  residents'  of  the 
State.  Stckholders  are  liable  only  for  any  unpaid  balance  on 
stock  held  by  them.  Corporations  may  be  formed  to  conduct 
any  lawful  business.  Mining  and  manufacturing  corporations 
are  permitted  to  have  offices  outside  of  the  State  and  to  hold 
meetings  at  such  offices. 

Foreign  corporations  must  file  Articles  of  Incorporation 
and  appoint  an  agent  to  accept  service  of  process. 

1207  (a).  The  legal  rate  of  interest  is  7%;  contract  rate 
12%.    The  penalty  for  usury  is  forfeiture  of  all  interests. 

Tennessee. 

1208.  Corporations  are  organized  under  general  laws. 
Not  less  than  five  persons  over  twenty-one  years  of  age  may 
form  a  corporation.  Stockholders  are  liable  to  creditors  for 
the  balance  unpaid  on  their  subscriptions'.  This  balance  is  re- 
garded as  a  trust  fund  for  the  benefit  of  creditors.  A  stock- 
holder is  not  relieved  from  liability  by  transferring  his  stock 
unless  the  transferree  pays  any  balance  that  may  be  due.  The 
usual  corporate  powers  are  granted  to  corporations.  They 
may  take  real  estate  for  debts  due  them. 

Foreign  corporations'  must  file  copy  of  charter  in  the  office 
of  the  Secretary  of  State  and  an  abstract  of  same  in  every 
county  where  they  do  business.  The  penalty  for  failure  to  do 
this  is  a  fine  of  from  $100  to  $500. 

1208  (a).  The  legal  and  contract  rate  of  interest  is  6%. 
Forfeiture  of  excess  interest  is  the  penalty  for  usury. 


402  COEPORATION    ACCOUNTING 

Texas. 

1209.  Corporations  may  be  formed  under  a  general  in- 
corporation law  by  three  or  more  persons,  two  of  whom  must 
be  citizens  of  the  State.  The  charter  must  be  filed  in  the  of- 
fice of  the  Secretary  of  State,  but  before  this  can  be  done  at 
least  50  per  cent  of  the  nominal  capital  must  have  been  sub- 
scribed, and  10  per  cent  of  the  nominal  capital  paid  in;  until 
this  is  done  the  Secretary  of  State  has  no  authority  to  issue 
a  charter.  If  the  directors  of  a  corporation  knowingly  pay  a 
dividend  when  the  corporation  is  insolvent,  or  one  which 
would  render  it  insolvent,  they  are  jointly  and  severally  liable 
for  the  amount  of  said  dividend  so  paid.  If  an  execution 
against  a  corporation,  except  railway,  religious,  or  charitable 
corporations',  is  returned  unsatisfied,  then  execution  may  be 
issued  against  any  stockholder  to  an  amount  equal  to  the 
amount  he  is  owing  the  corporation  on  his  stock.  Following 
are  the  fees  for  permits ;  $25  on  a  capital  stock  of  $100,000  or 
less;  $50  for  more  than  $100,000  and  less  than  $500,000;  $100 
on  a  capitalization  of  more  than  $500,000  and  less  than  $1,000,- 
000;  and  $200  for  any  amount  over  $1,000,000.  Permits  are 
not  granted  for  a  longer  period  than  ten  years'.  Foreign  cor- 
porations are  required  to  pay  to  the  State  the  following  fran- 
chise tax  in  proportion  to  their  capital ;  $25  for  $25,000  or  less ; 
$100  on  a  capital  exceeding  $25,000  and  not  exceeding  $100,- 
000.  In  excess  of  $100,000,  $100,  and  $1  additional  for  every 
$10,000  up  to  but  not  exceeding  $1,000,000.  In  excess  of 
$1,000,000  a  still  further  tax  of  $1  for  every  additional  $100,- 
000.  The  above  tax  is  payable  annually  in  advance  and  the 
permit  cannot  be  used  until  the  tax  is  paid.  If  a  corporation 
fails  to  pay  the  above  tax  for  any  year  the  permit  is  forfeited. 

1209  (a).  The  legal  rate  of  interest  is  6%  ;  contract  rcite 
10%.  The  penalty  for  usury  is  forfeiture  of  all  the  interest, 
and  if  paid,  twice  the  amount  may  be  recovered. 

Utah. 

1210.  It  requires  three  persons,  residents  of  this  State, 
to  form  a  corporation.  A  corporation  may  have  from  three  to 
twenty-five  directors,  not  less  than  one-fourth  of  which  shall 
constitute  a  quorum.  Any  lawful  business  may  be  incorpor- 
ated. Ten  per  cent  of  the  nominal  capital  must  be  subscribed 
and  paid  in  before  commencement  of  business.  Stock  may  be 
transferred  in  the  usual  manner  on  the  books  of  a  company. 
The  liability  of  stockholders  is  fixed  by  the  Articles  of  Incor- 
poration.  They  may  provide  for  the  private  property  of  stock- 


AND    COEPOEATION    LAW  403 

holders  being  liable  for  corporate  debts  or  they  may  exempt 
such  property. 

Foreign  corporations  must  file  certified  copy  of  Articles*  of 
Incorporation  with  the  Secretary  of  State  and  the  County 
Clerk  where  its  principle  place  of  business  is  located. 

1210  (a).  The  legal  rate  of  interest  is  8%;  by  contract 
any  rate. 

Vermont. 

121 1.  Five  or  more  persons  may  form  a  corporation  for 
the  transaction  of  any  business  not  opposed  to  law  or  public 
policy,  except  that  of  telegraph,  telephone,  express,  banking, 
insurance,  railroads',  savnigs  banks  and  trust  companies  or  for 
dealing  in  real  estate.  One-fourth  of  the  capital  must  be  paid 
in  before  the  commencement  of  business.  A  clerk  and  two 
directors  must  reside  in  Vermont.  Stockholders  are  person- 
ally liable  for  corporate  debts  to  an  amount  equal  to  the  stock 
held  by  them  until  the  whole  capital  stock  is  fully  paid  at 
which  time  individual  liability  ceases.  Annual  statements,  for 
purposes  of  taxation  must  be  made  to  the  City  Clerk  where 
the  corporation  is  located. 

121 1  (a).  The  legal  and  contract  rate  of  interest  is  6%. 
Usury  is  punished  by  the  forfetiure  of  excess  interest. 

Virginia. 

1212.  Virginia  corporations  are  chartered  by  special  act 
of  the  legislature  or  by  the  Circuit  Court  under  general  law, 
excepting  turnpikes,  railroads,  street  railways,  canals  and 
bank  circulation.  The  liability  of  stockholders'  is  equal  to  the 
par  value  of  the  stock  subscribed  for  by  them  individually. 
One  corporation  may  not  acquire  or  hold  stock  in  another 
corporation  unless  it  be  especially  allowed  to  do  so  by  its 
charter. 

Foreign  corporations,  by  complying  with  certain  statutory 
requirements  acquire  all  the  privileges  and  disabilities  of  do- 
mestic corporations. 

1212  (a).  The  legal  and  contract  rate  of  interest  is  6%. 
The  penalty  for  usury  is  forfeiture  of  entire  interest.  Cor- 
porations cannot  plead  usury. 

Washington. 

12 13.  Corporations  are  formed  under  general  laws,  and 
may  not  be  created  by  special  act.  Two  or  more  persons  may 
form  a  corporation.    Fifty  years  is  the  limit  of  corporate  exist- 


404  COEPOEATION    ACCOUNTING 

ence.  Directors  must  be  stockholders,  and  a  majority  of  them 
must  be  citizens  of  the  United  States,  and  at  least  one  of  them 
a  resident  of  Washington.  Stock  can  only  be  issued  to  bona 
fide  purchasers.  Stockholders  are  liable  to  creditors  for  the 
amount  due  on  their  subscriptions.  There  is  an  annual  license 
tax  of  $io.  In  most  cases  the  stock  must  all  be  subscribed  be- 
fore a  corporation  may  commence  business.  The  by-laws  may 
provide  for  the  times  and  manner  of  payment  of  subscriptions. 
In  the  absence  of  this  provision  the  directors  or  trustees'  may 
assess  the  stock.  Two-thirds  of  the  trustees  shall  constitute 
a  quorum.  A  trustees  may  be  removed  from  office  by  a  two- 
thirds  vote  of  the  stockholders.  The  same  vote  is  sufficient 
to  increase  or  reduce  the  capital  stock  or  to  disincorporate. 
Stock  may  not  be  reduced  below  the  corporate  debts. 

1213  (a).  The  legal  rate  of  interest  is  6%;  contract  rate 
12%.  The  penalty  for  usury  is  deduction  from  the  principle 
of  the  amount  of  interest  contracted  for  together  with  costs. 

West  Virginia. 

1214.  Joint  stock  companies  are  created  under  general 
law.  Corporations  cannot  be  created  by  special  charter.  No 
corporation  can  be  formed  for  the  purpose  of  buying  and  sell- 
ing land  for  profit;  neither  can  a  church  or  religious  denomi- 
nation be  incorporated.  Manufacturing  or  business  corpora- 
tions are  formed  by  the  association  of  five  or  more  persons. 
Two  or  more  classes  of  stock  may  be  issued  by  providing  fof 
this'  in  the  Articles  of  Incorporation.  Stockholders  must  pay 
in  at  least  10%  of  the  amount  subscribed  for.  There  must 
never  be  less  than  five  stockholders.  Charters  are  limited  to 
50  years,  but  they  may  be  renewed  and  the  time  extended. 
An  annual  state  license  must  be  paid,  the  amount  depending 
upon  the  capital.  Stockholders,  excepting  in  banking  corpor- 
ations, are  liable  only  for  their  subscriptions  or  the  amount 
remaining  unpaid  upon  same. 

1214  (a).  The  legal  and  contract  rate  of  interest  is  6%. 
Forfeiture  of  excess  interest  is  the  penalty  for  usury.  Cor- 
porations cannot  plead  usury. 

Wisconsin. 

1215.  A  corporation  may  be  formed  by  three  or  more  per- 
sons of  legal  age.  Corporations  can  not  commence  business 
until  at  least  one-half  of  the  capital  stock  is  subscribed  for  and 
at  least  20%  thereof  actually  paid  in.  Stockholders  are  only 
liable  for  amount  of  their  subscriptions  until  same  is  fully 


AND    COEPOEATION    LAW  40& 

paid,  except  in  the  case  of  wages.  They  are  at  all  times'  liable 
for  6  months  wages.  In  the  case  of  banks  there  is  a  double 
liability  for  corporate  debts. 

1215  (a).  The  legal  rate  of  interest  is  6%;  contract  rate 
10%.  The  penalty  for  usury  is  forfeiture  of  all  interest  and 
three  times  the  excess  is  recoverable. 

Wyoming. 

1216.  Three  or  more  persons  may  form  a  corporation. 
The  term  of  corporate  existence  shall  not  exceed  fifty  years. 
There  shall  not  be  less  than  three  nor  more  than  nine  trustees. 
A  certificate  of  incorporation  must  be  filed  in  the  office  of  the 
County  Clerk  of  each  county  wherein  the  corporation  does 
business.  The  capital  stock  of  domestic  corporations  is  not 
subject  to  taxation.  Stockholders  are  liable  up  to  the  par 
value  of  the  stock  for  which  they  have  subscribed. 

Foreign  corporations  are  required  to  file  an  acceptance  of 
the  constitution  and  also  to  file  Articles  of  Incorporation  and 
a  copy  of  the  laws  under  which  they  incorporate,  duly  authen- 
ticated. 

1216  (a).  The  legal  rate  of  interest  is  8%;  contract  rate 
is  12%.  The  penalty  for  usury  is  forfeiture  of  interest  and 
costs. 


APPENDIX. 

The  C.  P»  A.  Laws  of  California.    Questions  set  at  the 
Fifth  Examination  held  by  the  California  State 
Board  of  Accountancy,  June,  1904,  and  detailed 
Answers  thereto*    Also  an  Historic  Review  of 
of  Accountancy,  Past  and  Present. 

BY 

ALFRED  G-  PLATT,  C  R  A. 

President  of  the  Calif otnia  Society  of  Certified  Pttblic  Accountants 
Secretary  and  Member  of  the  State  Board  of  Accountancy 
Chairman  of  the  Board  of  Examiners  from  i90t  to  t906 


Accountancy — Past  and  Present. 


1208.  That  methods  of  accounting  and  bookkeeping  were 
known  to  the  Ancients  is  evidenced  by  clay  tablets  and 
papyri  which  have  been  found  by  archaeologists  in  the  ruins 
of  Babylon,  Assyria,  Egypt  and  Pompeii  upon  which  are  re- 
corded items  of  barter,  sale,  money  lending,  inventories,  in- 
come and  expense.  The  governmental  accounting  used  by 
the  Athenians  has  been  translated  into  English. 

1209.  Bookkeepers  were  employed  by  the  Pharaohs  in 
connection  with  the  royal  revenues.  They  kept  their  accounts 
on  a  papyrus  roll,  in  red  and  black  inks,  which  afterwards' 
were  audited.  The  Greeks  and  Romans  kept  perfectly  intel- 
ligible accounts  of  all  the  loadings  and  unloadings  of  their 
own  and  foreign  vessels.  Their  language  abounded  in  words 
and  phrases  relating  to  Accountancy. 

1210.  In  mediaeval  times  the  system  of  the  Exchequer  in- 
troduced into  England  by  the  Norman  conquerors,  and  the  in- 
ventory contained  in  the  Doomsday  Book  are  notable  in- 
stances of  early  accountancy. 

1213.  The  system  of  keeping  accounts  by  double  entry, 
instead  of  the  memorandum  form  of  single  entry,  is  supposed 
to  have  had  its  origin  in  Genoa,  Italy,  about  the  year  1340,  the 
first  treatise  on  the  subject  being  a  work  on  arithmetic  pub- 
lished by  Luca  Paciolo  at  Venice  in  1494.  In  this  book  the 
Arabic,  known  as  the  Oriental  method  of  notation  consisting 
of  figures  was  used  instead  of  the  cumbersome  Roman  capital 
letters. 

1214.  Modern  accounting  may  be  said  to  have  been  first 
recognized  as  a  profession  when  the  Society  of  Accountants 
in  Edinburgh  was  granted  a  royal  charter  in  1854;  this  was 
followed  by  other  incorporated  societies  at  later  dates.  A 
charter  was  granted  to  the  Institute  of  Accountants'  of  Eng- 
land and  Wales  in  1880,  and  the  Society  of  Accountants  and 
Auditors  was  incorporated  in  1885.  From  that  time  on  the 
profession  has  made  rapid  strides,  and  is  now  favorably  recog- 
nized, occupying  a  commanding  position  in  the  business 
world.  In  Canada  the  profession  secured  recognition  by 
Royal  Charter  granted  to  the  Association  of  Accountants  of 
Montreal  in  1880.    Since  then  charters  have  also  been  granted 


AND    COEPORATION    LAW  409 

to  the  Ontario,  Nova  Scotia,  Manitoba  and  British  Columbia 
Associations  and  recently  a  Society  has  been  incorporated 
in  the  Transvaal,  South  Africa. 

121 5.  In  the  United  States,  professional  accountants  came 
into  public  notice  by  the  passage  of  a  law  in  the  State  of  New 
York  in  1896,  authorizing  the  Regents  of  the  University  to 
grant  licenses  to  qualified  persons  to  practice  as  Certified  Pub- 
lic Accountants,  and  authorizing  them  to  append  to  their 
names  the  abbreviation  C.P.A.  Subsequently,  similar  laws 
were  passed  by  the  states  of  Pennsylvania  in  1899,  Maryland 
in  1900,  California  in  1901,  Washington  and  Illinois  in  1903, 
New  Jersey  in  1904,  and  Michigan  in  1905.  The  legislatures 
of  many  other  States'  at  the  present  time  have  pending  before 
them  similar  enabling  Acts,  with  reasonable  hope  of  their 
being  adopted  among  the  Statutes.  Thus  it  will  be  seen  that 
the  recognition  of  Accountancy,  or  as  it  is  now  termed  the 
""'C.P.A.  Movement"  is  rapidly  gaining  ground  in  this  country ; 
indeed  it  would  be  difficult  to  overestimate  the  importance  of 
the  science  and  art  of  accounting  in  relation  to  the  business 
affairs  of  the  world,  which  depend  in  a  large  measure  on  the 
careful  and  painstaking  labor,  the  technical  skill,  and  the  in- 
tegrity of  the  accountant — even  the  stability  of  a  government 
may  depend  on  the  accuracy  and  fidelity  of  those  intrusted 
with  its  financial  affairs  and  accounts. 

1216.  The  objects  sought  to  be  attained  by  the  enactment 
of  State  Accountantcy  Laws  are  of  the  greatest  importance 
to  the  public,  viz:  competency  and  probity.  All  the  C.P.A. 
Statutes  provide  for  the  revocation  of  a  certificate  for  just 
cause.  On  the  other  hand  the  "Certified  Public  Accountant" 
is  protected  in  his  profession  by  a  punitive  clause  making  it  a 
misdemeanor  for  any  person  not  legally  authorized  to  use  such 
designation  or  title,  or  its  equivalent  C.  P.  A. 

1217.  It  is  to  be  hoped  that  in  the  near  future  wise  legis- 
lation may  enact  further  beneficient  laws,  compelling  all  cor- 
porations in  which  the  public  are  interested  as  taxpayers,  in- 
vestors, bondholders  or  stockholders,  to  periodically  have  their 
financial  affairs  audited  by  a  Certified  Public  Accountant,  and 
also  to  publish  annually  (or  oftener)  a  true  exhibit  of  their 
Balance  Sheet,  with  his  Certificate  verifying  its  correctness"  ap- 
pended thereto.  It  can  not  be  doubted  for  a  moment,  that 
such  a  Statute  would  protect  both  the  largest  capitalist  and 
the  smallest  investor  in  their  holdings ;  it  would  also  be  the 
death  blow  to  all  get-rich-quick  schemes  and  wildcat  specula- 
tion, and  would  even  exercise  a  restraining  influence  on  Trusts 
with  watered  capital. 


410  COKPOEATION    ACCOUNTING 

I2i8.  The  application  of  the  laws  already  enacted  by  the 
States  hereinbefore  mentioned,  does  not  differ  in  any  essential 
particular;  consequently  the  California  Statute  and  Rules  be- 
ing typical  are  given  herewith. 


STATUTES    OF    1901. 
CHAPTER  CCXIII. 


An  Act  to  Create  a  State  Board  of  Accountancy  and  Pre- 
scribe Its  Duties  and  Powers ;  to  Provide  For  the  Examination 
of  and  Issuance  of  Certificates  to  Qualified  Applicants^  With 
the  Designation  of  Certified  Public  Accountant;  and  to  Pro- 
vide the  Grade  of  Penalty  for  Violations  of  the  Provisions 
Hereof. 


(Approved  March  23,  1901.) 

The  People  of  the  State  of  California,  represented  in 
Senate  and  Assembly,  do  enact  as  follows : 

1219.  Section  i.  Within  thirty  days  after  the  passage  of 
this  act  the  governor  shall  appoint  five  persons,  at  least  three 
of  whom  shall  be  competent  and  skilled  public  accountants 
who  shall  have  been  in  practice  as  such  in  this  State  for  not 
less  than  five  consecutive  years,  to  constitute  and  serve  as  a 
state  board  of  accountancy.  The  members  of  such  board  shall, 
within  thirty  days  after  their  appointment,  take  and  subscribe 
to  the  oath  of  office  as  prescribed  by  the  Political  Code,  and 
file  the  same  with  the  secretary  of  state.  They  shall  hold 
office  for  four  years,  and  until  their  successors  are  appointed 
and  qualified ;  save  and  except  that  one  of  the  members'  of  the 
board  first  to  be  appointed  under  this  act  shall  hold  office  for 
one  year ;  one  for  two  years ;  one  for  three  years,  and  two  for 
four  years.  Any  vacancies  that  may  occur,  from  any  cause, 
shall  be  filled  by  the  governor  for  the  unexpired  term;  pro- 
vided, that  all  appointments  made  after  the  first  year  must  be 
made  from  the  roll  of  certificates  issued  and  on  file  in  the  office 
of  the  governor. 

Sec.  2.  The  state  board  of  accountancy  shall  have  its 
office  in  the  city  and  county  of  San  Francisco,  and  its  powers 
and  duties  shall  be  as  follows : 


AND    COEPOEATION    LAW  411 

1.  To  formulate  rules  for  the  government  of  the  board 
and  for  the  examination  of  and  granting  of  certificates  of  qual- 
ification to  persons  applying  therefor; 

2.  To  hold  written  examinations  of  applicants  for  such 
certificates,  at  least  semi-annually,  at  such  places  as  circum- 
stances and  applications  may  warrant ; 

3.  To  grant  certificates  of  qualification  to  such  applicants 
as  may,  upon  examination,  be  found  qualified  in  "theory  of 
accounts,"  "practical  accounting,"  "auditing,"  and  "commer- 
cial law,"  to  practice  as  certified  public  accountants ; 

4.  To  charge  and  collect  from  all  applicants  such  fee,  not 
exceeding  twenty-five  dollars,  as  may  be  necessary  to  meet 
the  expenses  of  examination,  issuance  of  certificates  and  con- 
ducting its  office;  provided,  that  all  such  expenses,  including 
not  exceeding  five  dollars  per  day  for  each  member  while  at- 
tending the  sessions  of  the  board  or  conducting  examinations, 
must  be  paid  from  the  current  receipts,  and  no  portion  thereof 
shall  ever  be  paid  from  the  state  treasury ; 

5.  To  require  the  annual  renewal  of  all  such  certificates, 
and  to  collect  therefor  a  renewal  fee  of  not  exceeding  one 
dollar ; 

6.  To  revoke  for  cause  any  such  certificate,  after  written 
notice  to  the  holder,  and  a  hearing  being  had  thereon;  pro- 
vided, that  such  revocation  must  receive  the  affirmative  vote 
of  at  least  four  members  of  the  board ; 

7.  To  report  annually  to  the  governor,  on  or  before  the 
first  day  of  December,  all  such  certificates  issued  or  renewed, 
together  with  a  detailed  statement  of  receipts  and  disburse- 
ments ;  provided,  that  any  balance  remaining  in  excess  of  the 
expenses  incurred  may  be  retained  by  the  board  and  used  in 
defraying  the  future  expenses  thereof ; 

8.  The  board  may,  in  its  discretion,  under  regulations 
provided  by  its  rules,  waive  the  examination  of  applicants 
possessing  the  qualifications  mentioned  in  section  three,  who 
shall  have  been  for  more  than  three  years'  prior  to  the  passage 
of  this  act  practicing  in  this  state  as  public  accountants  on 
their  own  account,  and  who  shall,  in  writing,  apply  for  such 
certificates  within  one  year  thereafter. 

Sec.  3.  Any  citizen  of  the  United  States,  or  any  person 
who  has  duly  declared  his  intention  of  becoming  such  citizen,, 
residing  and  doing  business  in  this  state,  being  over  the  age 
of  twenty-one  years  and  of  good  moral  character,  may  apply 
to  the  state  board  of  accountancy  for  examination  under  its 
rules,  and  for  the  issuance  to  him  of  a  certificate  of  qualifica- 
tion to  practice  as  a  certified  public  accountant,  and  upon  the 


412  COEPORATION    ACCOUNTING 

issuance  and  receipt  of  such  certificate,  and  during  the  period 
of  its  existence,  or  of  any  renewal  thereof,  he  shall  be  styled 
and  known  as"  a  certified  public  accountant  or  expert  of  ac- 
counts, and  no  other  person  shall  be  permitted  to  assume  and 
use  such  title  or  to  use  any  words,  letters  or  figures  to  indi- 
cate that  the  person  using  the  same  is  a  certified  public  ac- 
countant. ' 

Sec.  4.  Any  violation  of  the  provisions  of  this  act  shall  be 
deemed  a  misdemeanor. 

Sec.  5.     This  act  shall  take  effect  from  and  after  its  passage. 

Rules  of  the  California  State  Board  of  Accountancy. 

1220.  This  Board  shall  be  known  under  the  Act  passed 
by  the  Legislature  of  1901  as  the  State  Board  of  Accountancy. 

2.  The  Board  shall  organize  after  the  members'  thereof 
have  duly  qualified  and  shall  elect  a  President,  Vice-President, 
Secretary  and  Treasurer,  who  shall  hold  office  for  the  term  of 
one  year  and  until  their  successors  have  been  duly  elected. 

3.  The  Board  shall  hold  at  least  two  meetings  each  year, 
at  such  time  and  place  as  the  Board  by  resolution  may  de- 
termine. The  annual  meeting  shall  be  held  on  the  last  Satur- 
day in  May  of  each  year. 

4.  Three  members*  of  the  Board  shall  constitute  a  quorum 
to  transact  all  business. 

5.  The  fee  for  all  applicants  for  examination  shall  be 
Twenty-five  dollars. 

6.  The  Committee  on  examinations  shall  consist  of  three 
members  of  this  Board  who  shall  be  appointed  by  the  Pres- 
ident. 

7.  The  duty  of  the  Committee  on  Examinations  shall  be 
to  prepare  a  list  of  questions  to  be  propounded  at  each  of  the 
examinations.  Said  Committee,  however,  shall  present 
a  separate  set  of  questions  for  each  meeting,  on  the  day  such 
Committee  is  to  meet  for  examination  of  candidates. 

8.The  full  C.  P.  A.  (Certified  Public  Accountant)  certifi- 
cate will  be  granted  only  to  those  who  have  had  three  years 
experience  satisfactory  to  this  Board  in  the  practice  of  ac- 
counting. 

9.  Candidates  having  a  preliminary  education  satisfactory 
to  this  Board,  and  passing  the  required  examination,  but  lack- 
ing the  three  years  experience  required  for  the  full  C.  P.  A. 
certificate,  may  be  certified  as  Associate  Accountants'  under 
the  same  conditions  as  to  residence  and  character. 


AND    COEPOEATION    LAW  413 

10.  All  applicants  for  a  certificate  shall  file  their  appHca- 
tion  in  writing  with  the  Secretary  of  this  Board,  accompanied 
by  the  fee.  The  Secretary  shall  file  the  application,  and  shall 
notify  the  applicant  at  least  ten  days'  before  the  Board  intends 
holding  an  examination,  of  the  time  and  place  where  it  will 
be  held. 

11.  All  applications  must  be  made  on  blanks  provided  by 
the  Board,  and  no  application  will  be  considered  unless  ac- 
companied by  the  fee  fixed  by  this  Board. 

12.  Examinations  will  be  conducted  under  the  following 
regulations :  All  examinations  shall  be  written  and  include 
questions  on  the  following  subjects :  Theory  of  Accounts, 
Practical  Accounting,  Auditing  and  Commercial  Law.  Appli- 
cants must  complete  all  subjects  within  the  time  allotted  by 
the  Examining  Committee  of  this  Board. 

13.  In  the  even  of  an  applicant  failing  to  pass  the  exami- 
nation, the  same  fee  will  be  required  on  his  re-application  as 
provided  by  this  Board  for  the  original  application. 

14.  This  Board  will  grant  certificates  only  to  those  appli- 
cants who  shall  be  over  twenty-one  years  of  age,  of  good 
moral  character,  and  shall  correctly  answer  at  least  70  per 
cent  of  all  the  questions'  on  each  and  every  subject. 

15.  The  fee  for  renewal  of  a  certificate  granted  by  this 
Board  shall  be  due  and  payable  on  the  second  day  of  January 
of  each  year. 

16.  All  certificates  that  are  not  renewed  within  six  months 
of  their  expiration  by  payment  of  one  dollar  fee,  as  provided 
by  the  Act,  shall  be  suspended ;  and  on  account  of  one  year's 
delinquency  to  pay  the  renewal  fee,  the  certificate  heretofore 
granted  shall  lapse  and  be  cancelled  on  the  Register. 

17.  The  Board  in  its'  discretion  will  register  the  unre- 
voked certificate,  held  by  a  lawful  Certified  Public  Accountant, 
and  issued  by  legislative  authority  of  another  state,  or  country, 
and  will  grant  to  him  an  annual  Certificate  of  Registration, 
entitling  the  holder  thereof  to  practice  as  a  Certified  Public 
Accountant  in  the  State  of  California.  The  annual  charge  for 
such  registration  shall  be  Five  dollars,  and  the  certificate  may 
be  revoked  for  cause  at  any  time,  as  provided  in  Subdivision 
6,  Section  2,  Chap.  CCXIII,  Statutes  of  1901. 

N.  B.  The  Secretary  will  be  glad  to  answer  any  questions 
by  mail  or  in  person,  concerning  the  regulations  pertaining 
to  examinations  not  herein  set  forth. 


414  CORPORATION    ACCOUNTINa 

California  State  Board  of  Accountancy. 
Fifth  Examination. 

I22I.  The  following  questions  illustrate  the  scope  of  the 
examination  which  a  candidate  is  required  to  undergo,  in  order 
to  obtain  a  certificate  to  practice  as  a  Certified  Accountant. 
It  is  not  contended  that  the  answers  subjoined  thereto,  are 
such  as  would  constitute  a  text-book  authority  on  each  sub- 
ject. They  are  more  as  a  guide  for  applicants  and  an  indica- 
tion as  to  what  is  required  to  obtain  a  standard  of  70  per  cent 
on  each  subject  in  order  to  successfully  pass  the  examination. 

Theory  of  Accounts. 

Time  allowed :     Two  hours. 

I.  State  briefly  your  views  as  to  the  difference  between: 
(a).  Single  entry  bookkeeping;  (b),  Double  entry  bookkeep- 


1222  (a).  Single  Entry  Bookkeeping  involves  no  particu- 
lar system,  it  merely  records  charges  to  customers',  and  obli- 
gations to  debtors;  it  therefore  is  a  mere  memoranda  of  in- 
debtedness. 

1223  (b).  Double  Entry  principles  require  that  each  debit 
must  receive  a  corresponding  credit;  consequently,  an  entry 
that  diminishes  one  account,  must  increase  another  in  order 
that  the  Ledger  may  at  all  times  be  in  equilibrium. 

11.  What  are  the  essential  differences  between:  (a).  Trial 
Balance;  (b).  Balance  Sheet;  (c),  Statement  of  Affairs  and 
Condition;  (d).  Statement  of  Assets  and  Liabilities. 

1224  (a).  A  Trial  Balance  is  a  list  or  schedule  of  the  open 
accounts  in  the  Ledger  or  Ledgers  at  a  certain  date — primarily 
its  purpose  is  to  show  the  equilibrium  of  the  Ledger,  and 
demonstrate  that  for  the  entry  of  every  debit  a  corresponding 
credit  has  been  posted.  In  this  way  it  exhibits'  an  equal  ag- 
gregate sum  of  debits  and  credits.  It  is  a  preliminary  schedule 
from  which  other  statements  such  as  Balance  Sheet,  Assets 
and  Liabilities,  Affairs  and  Condition  can  be  derived  and  de- 
termined. 

1225  (b).  A  Balance  Sheet  is  a  concise  statement  ab- 
stracted from  a  Ledger  in  balance  after  certain  accounts  have 
been  merged  into  Profit  &  Loss,  and  shows  at  the  date  repre- 
sented the  active  Assets  and  Liabilities. 


AND    COEPORATION    LAW  415 

1226  (c).  A  Statement  of  Affairs  and  Condition  is  derived 
from  the  Assets  and  Liabilities  and  shows  the  net  amount 
conservatively  estimated  to  be  realized  from  the  gross  assets' 
and  the  full  amount  of  liabilities  owing.  It  is  more  generally 
a  statement  of  an  insolvent  for  the  benefit  of  the  creditors  with 
respect  to  realization  and  liquidation. 

1227  (d).  A  Statement  of  Assets  and  Liabilities  is  gen- 
erally derived  from  the  Balance  Sheet  but  may  be  made  up 
from  any  data  obtainable.  On  the  debit  side  it  shows  the  fixed 
and  current  assets  of  the  business  including  active  accounts 
due  from  Hel^^|p^^^ ;  and  on  the  credit  side  the  amounts  due  to 
creditors,  tTTe  capital  and  surplus  after  all  nominal  accounts 
have  been  closed.  It  should  contain  proper  Reserve  and  Sus- 
pense Accounts  for  contingencies. 

III.  Give  a  brief  definition  of  the  following  accounts : 
(a),  Capital;  (b),  Revenue;  (c),  Trading;  (d),  Profit  and 
Loss;  (e),  Deficiency. 

1228  (a).  Capital  in  a  strict  sense  means'  the  actual 
amount  of  money  or  property  invested  in  a  business  or  enter- 
prise at  its'  inception  or  at  any  subsequent  time.  In  a  general 
sense  it  is  understood  to  mean  the  surplus  of  assets  over  lia- 
bilities after  making  proper  provision  for  all  contingencies. 
Capital  therefore  comprises  any  and  all  properties,  real  or 
personal,  employed  in  a  business. 

1229  (b).  Revenue  Account  consists  of  all  accounts  re- 
lating in  detail  to  income,  earnings  or  profits;  per  contra  are 
items  of  cost,  expenses  or  losses,  the  former  being  credits,  and 
the  latter  debits  to  Revenue  Account,  as  shown  by  the  Trad- 
ing Account  and  Profit  and  Loss  Account  respectively. 

1230  (c).  Trading  Accounts  deal  with  purchase-costs 
and  proceeds  of  sales.  Cost  includes  outlay  for  materials, 
freight,  duty  and  other  charges  incidental  to  the  acquisition 
of  the  raw  product ;  also  labor  and  costs  of  manufacturing. 

1231  (d).  Profit  and  Loss  is  essentially  an  accommoda- 
tion account  for  the  purpose  of  adjustment.  It  is  debited  with 
all  expenses  incident  to  the  business  such  as  Rent,  Insurance, 
Salaries,  Advertising,  Stationery,  etc. ;  and  is  credited  with 
the  gross  profit  from  Trading  Account  and  all  other  sources 
of  income.  The  difference  between  the  debits  and  credits  con- 
stitute net  losses  or  net  profits,  as  the  case  may  be.  From  the 
latter,  provision  is  made  for  Dividends,  Reserves  and  Suspense 
Accounts,  and  the  remaining  net  profit  (if  any)  is  then  distrib- 
uted to  Surplus,  or  Capital  Accounts. 


416  CORPOKATION    ACCOUNTING 

1232  (e).  A  Deficiency  Account  is'  generally  prepared  to 
accompany  a  Statement  of  Affairs  and  Condition  showing  a 
net  loss.  It  is  a  summary  in  classified  form  of  the  causes  con- 
tributing to  the  loss  in  so  far  as  they  relate  to  revenue  and 
impairment  of  capital.  It  is  credited  with  capital  invested  and 
its  earnings  if  any,  and  debited  with  losses  from  bad  debts, 
shrinkage  in  value,  liability  on  endorsements,  loss  on  trading, 
drawings  from  business  for  private  use,  etc. 

1233.  A  Deficiency  Account  is  usually  designed  for  the 
benefit  of  creditors  or  stockholders',  accounting  as  it  does  for 
the  net  loss  incurred  during  the  period  under  review  and  the 
causes  contributing  thereto. 

IV.  What  is  the  difference  between:  (a),  Receipts  and 
Disbursements;  (b).  Income  and  Expenditure. 

1234  (a).  Receipts  and  Disbursements  is  a  summarized 
cash  statement  showing  moneys  actually  received  and  dis- 
bursed during  a  specified  period. 

1235  (b).  Income  and  Expenditure  involve  the  entire 
earned  income  from  all  sources  for  the  period  to  which  they 
relate  whether  received  in  cash,  or  due  and  accrued,  as  well 
as  all  the  expenditures  of  the  period  whether  paid  or  owing; 
in  other  words,  income  and  expenditure  include  all  outstand- 
ings, whether  debit  or  credit. 

V.  What  are  considered  to  be  Controlling  Accounts? 

1236.  Controlling  Accounts  are  usually  kept  in  either  the 
General  or  Private  Ledgers ;  they  govern  such  accounts  as 
are  kept  in  the  Individual  Ledgers'.  The  aggregate  of  the 
Controlling  Accounts  given  in  concise  form  is  the  status  of 
the  trade  resources  and  liabilities  of  a  business. 

VI.  Define  the  difference  between:  (a).  Permanent  As- 
sets;  (b).  Floating  Assets. 

1237  (a).  Permanent  Assets  are  such  investments  as'  are 
necessary  to  conduct  the  business,  and  must  be  kept  in  a  state 
of  efficiency  in  order  to  carry  on  the  business. 

1238  (b).  Floating  Assets  are  such  as  are  subject  to  con- 
stant change  either  by  increase  or  diminution  in  the  ordinary 
course  of  business  and  are  generally  considered  as  the  work- 
ing capital. 

VII.  How  should  bad  or  doubtful  assets  be  taken  care  of 
at  the  close  of  any  fiscal  period  ? 


AND    COEPOEATION    LAW  417 

1239.  Actual  Bad  Assets  should  be  written  off  to  Profit 
and  Loss  and  a  Reserve  Fund  created  to  provide  for  such  por- 
tion of  the  doubtful  assets  as*  are  considered  depreciated  or  un- 
realizable. 

VIII.  State  your  views  as  to  what  is  known  as  the 
"Voucher  System."  (a),  Its  advantages  (if  any).  (b),  Its 
disadvantages  (if  any). 

1240  (a).  Many  accountants  favor  the  "Voucher  System" 
as  being  a  saver  of  time  and  labor,  and  also  very  accurate.  It 
is  more  particularly  adapted  for  a  business  where  the  accounts 
are  promptly  settled,  and  to  some  extent  it  does  away  with 
unnecessary  entries. 

1 241  (b).  The  chief  disadvantages  are  that  Vouchers  are 
sometimes  mislaid,  and  at  other  times  not  returned  promptly 
by  payee;  in  either  event  the  Voucher  record  is  incomplete; 
this  however  may  be  overcome  by  the  use  of  a  voucher  check. 
The  saving  of  time  is  also  disputed,  and  it  is  very  evident  that 
some  businesses  would  not  be  benefited  by  its  use. 

IX.  In  a  concise  way  give  your  opinion  as  to  the  advan- 
tages of  the  following  systems:  (a),  Bound  Books  of  Ac- 
count;   (b).  Loose  Leaf  Ledger;    (c),  Card  Ledger. 

1242  (a).  Bound  Books  of  Account  are  necessary  for 
those  in  which  Controlling  Accounts  are  kept  in  order  that  no 
abstraction  may  take  place  without  prompt  discovery. 

1243  (b).  A  Loose  Leaf  System  is  convenient  in  an  ex- 
tensive business  where  a  number  of  Ledgers  are  kept.  The 
aggregate  amount  of  customers  accounts  must  agree  with  the 
Controlling  accounts  in  General  Ledger. 

1244  (c).  What  is  known  as  a  Card  Ledger  is  in  principle 
the  same  as  a  Loose  Leaf  system,  it  merely  being  a  different 
device  accomplishing  the  same  purpose. 

X.  What  purpose  does  a  Private  Ledger  subserve? 

1245.  The  purpose  of  a  Private  Ledger  is  to  show  in  a 
concrete  form  the  actual  state  of  an  individual  or  partnership 
business  without  unnecessary  details.  It  also  shows  the  sep- 
arate partnership  interests,  how  and  to  whom  the  net  profits 
or  losses  were  distributed,  and  other  data  which  may  be  con- 
sidered of  a  private  nature. 


418  COEPORATION    ACCOUNTING 

Auditing. 
Time  allowed  :     Two  hours. 

I.  What  are  the  duties  of  an  Auditor? 

1246.  The  Duties  of  an  Auditor  are  inspective ;  he  should 
critically  examine  all  the  entries  recorded  in  the  general  books 
of  account,  and  certify  to  the  correctness  or  incorrectness  of 
the  Balance  Sheet. 

1247.  With  partnerships  he  should  review  the  articles'  of 
agreement  on  which  the  partnership  is  based,  and  see  that  the 
profits  or  losses  are  distributed  in  accordance  therewith.  He 
should  also  scrutinize  the  securities,  notes',  deeds  and  other 
documents  supporting  the  assets. 

1248.  In  auditing  a  corporation  he  should  inspect  the 
Minute  Book,  to  ascertain  that  all  the  proceedings  have  been 
regular,  and  have  not  trespassed  beyond  the  powers'  granted 
by  the  articles  of  incorporation. 

1249.  He  should  be  careful  to  see  that  the  assets  are  not 
over-valued,  nor  the  liabilities  under-stated ;  also  that  proper 
reserves  are  created  for  special  purposes'  and  contingencies ; 
that  dividends  are  only  declared  from  profits  actually  earned ; 
and,  in  general,  thoroughly  investigate  all  transactions  during 
the  period  under  review. 

II.  What  qualifications  should  he  possess? 

1250.  He  should  possess  tact,  caution,  firmness,  fairness, 
courage,  integrity,  discretion,  industry,  judgment,  patience 
and  good  temper.  He  must  be  a  thorough  accountant,  con- 
versant with  various  systems  of  bookkeeping  in  use,  and  pos- 
sess a  knowledge  of  the  laws  relating  to  partnerships',  corpor- 
ations, estates  in  probate  and  in  bankruptcy,  and  have  a  gen- 
eral knowledge  of  affairs  associated  with  commercial  usage. 
The  more  extended  his  knowledge  of  Accountics,  the  better 
qualified  he  is  for  an  Auditor. 

III.  In  making  an  audit  what  should  an  auditor  do  under 
the  following  conditions  or  instructions:  (a),  With  limitation; 
(b).  Without  limitation;  (c).  Where  an  audit  has  been  pre- 
viously made  to  a  certain  date. 

1251  (a).  He  should  confine  his  audit  to  the  period,  or 
instructions  designated  by  his  client;  but  should  he  have 
reason  to  believe  or  suspect  that  errors  exist  at  other  times 
not  included  in  his'  orders,  he  should  report  his  findings  and 
conclusions  to  his  clients,  and  request  further  instructions. 


AND    COEPORATION    LAW  419 

1 152  (b).  He  should  as  far  as  possible  satisfy  himself  that 
the  entries'  in  books  of  accounts  and  records  are  correct,  so  as 
to  be  able  to  give  a  certificate  thereon. 

1253  (c).  In  the  absence  of  instructions  to  the  contrary, 
he  should  accept  the  correctness  of  his  predecessor's  work, 
provided  he  is  satisfied  the  party  making  it  was  competent; 
otherwise,  he  would  be  justified  in  reviewing  the  former's 
work. 

IV.  What  are  the  principal  books  and  records  to  be 
audited  with  reference  to:  (a).  Personal  business  or  firm; 
(b).  Corporation. 

1254.  All  books  of  original  entry  such  as  Cash,  Journal^ 
Check  and  Bank  Book,  Voucher  Record,  should  be  thoroughly 
audited  in  respect  to  the  entries,  postings,  footings  and  for- 
wardings  in  addition  to  which  the  Ledger  entries  and  foot- 
ings, and  also  the  Trial  Balance  and  Vouchers  should  be  veri- 
fied. The  Partnership  Deed  should  also  be  inspected,  and  the 
Profit  and  Loss'  Account  and  Balance  Sheet  should;  be  con- 
firmed. 

1255  (b).  The  above  mentioned  procedure  should  also 
govern  the  audit  of  a  corporation  together  with  an  inspection 
of  the  Minute  book.  Stock  Ledger  and  Journal,  Transfer  and 
Certificate  books. 

V.  Explain  what  would  be  your  method  of  procedure  in 
auditing  the  affairs  of  a  Bank. 

1256.  The  first  thing  to  do  in  auditing  a  Bank  is  to  count 
and  verify  the  cash  on  hand,  and  see  that  it  agrees  with  the 
general  Ledger  Account.  Particular  attention  should  be  paid 
to  Cashier's  checks,  tags,  and  other  memoranda.  Pass'  books, 
especially  those  of  large  depositors,  should  be  written  up,  and 
the  balance  verified  by  the  Auditor's  signature.  Securities, 
Notes,  Collection  drafts,  and  Remittances  should  be  inspected, 
and  amounts'  compared  with,  the  balances  in  the  General 
Ledger,  and  verified  by  correspondence.  Special  attention 
should  be  given  to  see  that  all  Certificates  of  Deposit  that 
have  been  paid,  have  been  canceled  both  on  the  face  and  on 
the  stub ;  and  that  balance  to  credit  of  the  account  compares 
with  the  outstanding  certificates  as  represented  on  the  stubs 
and  Certificate  Register. 

1257.  Amount  of  due  and  accrued  interest  on  notes  and 
overdrafts  should  be  ascertained,  and  delinquencies  reported. 

1258.  The    Depositor's    Ledger   should    be    carefully    in- 


420  CORPORATION    ACCOUNTING 

spected  for  such  accounts  aa  have  not  been  balanced  and 
checks  returned  for  thirty  days  prior  to  the  audit.  A  state- 
ment should  be  made  out  and  forwarded  to  the  depositor  with 
request  that  he  compare  same  with  his  books  and  report 
whether  the  statement  is  correct  or  incorrect. 

1259.  The  collateral  securities  for  loans  should  be  exam- 
ined and  compared  with  the  Note  Register,  in  which;  the 
names  of  guarantors  should  also  be  recorded. 

1260.  Discounted  paper  purchased  by  the  Bank  should  be 
compared  with  the  entries  in  the  Register,  and  the  aggregate 
amount  agree  with  the  balance  of  ''Discounts"  in  the  General 
Ledger. 

1261.  Drafts  drawn  on  correspondent  banks'  and  remain- 
ing unpaid  should  be  noted  and  the  items  checked  to  the  re- 
spective accounts. 

1262.  Investments  of  Real  and  Personal  property  should 
be  examined,  and  their  values  ascertained. 

1263.     The   Expense  account   should   be   thoroughly  scru- 
tinized Stock  Ledger  and  Stock  Journal  investigated. 

1264.  All  balances  due  to,  and  from  corresponding  banks 
and  reserve  agents',  should  be  verified,  also  all  items  in  transit, 
and  the  last  statement  rendered  should  be  confirmed  and  re- 
conciled. 

VI.  In  auditing  the  affairs  and  condition  of  a  Building 
and  Loan  Association,  what  would  be  the  scope  of  your  ex- 
amination ? 

1265.  After  making  a  general  audit  of  the  books  of  a 
Building  and  Loan  Association  particular  attention  should  be 
given  to  the  outstanding  loans,  and  premiums  paid  for  same ; 
also  the  collateral  security.  The  various  series  of  stock  issues 
should  be  tabulated  in  order  to  ascertain  their  value  on  the 
books  of  the  company;  and  care  should  be  taken  to  see  that 
proper  Reserve  Funds  are  created  for  amortization. 

VII.  In  making  an  audit  of  an  Insurance  Company,  state 
briefly  what  would  constitute  your  audit. 

1266.  In  auditing  an  Insurance  Company  the  cash  on  hand 
and  Cash  Book  should  receive  first  consideration,  and  after 
proceeding  in  the  usual  way  of  auditing  a  corporation,  the 
premiums  due  and  unpaid  should  be  ascertained,  commissions 
and  brokerages,  both  debit  and  credit,  checked  and  verified, 
and  the  per  cent  of  net  monthly  income  and  expense  computed. 


AND    CORPOEATION    LAW  421! 

VIII.  When  would  you  deem  it  expedient  to  accept  prop- 
erly signed  and  endorsed  checks  as  vouchers? 

1267.  In  a  case  where  original  invoices  are  either  lost, 
mislaid,  or  cannot  be  provided,  endorsed  checks  with  the  sig- 
nature of  the  payee,  guaranteed  by  a  bank  or  a  responsible 
party  may  be  accepted  in  lieu  of  original  voucher;  but  it  is' 
more  desirable  that  the  original  invoice  together  with  the 
Voucher  Receipt  should  be  in  evidence. 

IX.  In  contra-distinction  to  the  duties  of  an  Auditor, 
what  are,  generally,  those  of  an  Accountant? 

1268.  The  duties  of  an  Auditor  are  generally  considered 
to  be  inspective  in  ascertaining  errors,  omissions,  inaccuracies, 
frauds,  defalcations,  etc.,  thereafter  reporting  his  findings  to 
his  clients;  whereas  the  duties  of  an  Accountant  are  creative 
and  constructive,  in  order  to  correct  errors,  and  also  to  sug- 
gest the  most  desirable  system  of  accounts  and  methods  that 
should  be  employed,  and  to  install  same  if  required. 

X.  Draw  up  a  brief  form  of  certificate  that  should  be 
given  by  an  auditor  where  you  find  the  books  of  accounts  have 
been:     (a).  Properly  kept;    (b),  Improperly  kept. 

1269  (a).  In  compliance  with  your  valued  instructions,  I 
have  made  a  thorough  investigation  of  the  Books  and  Ac- 
counts of and  herewith  I  submit  my 

report  in  detail. 

Receipts  and  disbursements  have  been  properly  accounted 
for,  and  the  vouchers  inspected  and  approved. 

I  have  satisfied  myself  as  to  the  general  correctness  of  the 
books'  of  account  which  I  find  have  been  carefully  and  prop- 
erly kept.  (Signature) 

1270  (b).     My  investigation  of  the  Books  and  Records  of 

the show  that  they  are  not  in  balance^ 

as  per  accompanying  exhibits. 

The  Trial  Balance  has  at  times  been  forced,  but  I  do  not 
find  that  any  cash  or  other  property  has  been  embezzled; 
nevertheless,  the  books  have  been  kept  in  such  a  reckless  man- 
ner as  to  easily  permit  fraud. 

Your  immediate  attention  should  be  given  to  this*  matter, 
and  a  more  perfect  system  adopted. 

(Signature) 


422  CORPOEATION    ACCOUNTING 

Commercial  Law. 

Time  allowed.     Two  hours. 

I.  What  is  the  legal  rate  of  interest  in  California?  (a). 
What  exceptions  are  permitted  (if  any),  (b),  When  is  com- 
pound interest  permitted,  and  when  not? 

1271.  Seven  per  cent,  (a),  Any  rate  agreed  upon  in  writ- 
ing, except  as  to  pawnbrokers;  (b).  Permitted  on  notes  if  so 
expressed,  but  not  on  judgments. 

II.  State  when  the  statute  of  limitation  applies  upon: 
(a),  An  obHgation  not  in  writing;  (b).  An  instrument  in 
writing;     (c),  Mesne  profits  of  real  property. 

1272.  (a),  2  years;  (b),  4  years  after  maturity;  (c),  5 
years. 

III.  Define  the  following  terms:  Demurrage,  Equity, 
Escrow,  Goodwill,  Ultra  Vires',  Usury. 

1273.  Demurrage — An  allowance  made  for  the  detention 
of  a  vessel  beyond  the  lay  days  as  specified  in  the  charter 
party;  an  amount  charged  for  the  detention  of  railroad  roll- 
ing stock,  or  other  property. 

1274.  Equity  was  originally  unwritten  law,  providing  re- 
lief  in  special  cases  where  the  common  law  was  inapplicable. 
From  the  effect  of  time  and  precedent,  equity  rules  and  de- 
cisions have  now  become  fixed  law. 

1275.  Escrow — An  instrument  in  writing  delivered  to  a 
third  party,  to  be  by  him  delivered  to  the  grantee  or  obligee 
upon  the  performance  of  certain  expressed  conditions,  which 
when  fulfilled,  together  with  the  delivery,  completes  the  title 
and  ownership. 

1276.  Ultra  Vires  means  "beyond  their  powers,"  "exceed- 
ing their  authority,"  etc.,  as  applied  to  the  acts  of  a  corpora- 
tion. 

1277.  Usury — Compensation  for  use  of  money  in  excess 
of  the  legal  interest  rate. 

1278.  Goodwill  is  considered  an  asset  of  a  going  business, 
hased  upon  the  assumption  that  the  customers  will  continue 
their  trade.  It  is  transferrable,  but  per  se  does  not  include 
the  right  to  the  name,  unless  specially  agreed  thereto,  and 
may  by  stipulation  restrain  the  vendor  from  competition. 


AND    COEPOEATION    LAW  423^ 

IV.  State  what  is  meant  by:  Arbitration,  Guaranty,. 
Warranty. 

1279.  Arbitration  is  the  submission  to  disinterested  par- 
ties of  matters  in  dispute  and  agreeing  to  abide  by  their  de- 
cision. 

1280.  Guaranty  is  an  agreement  in  writing,  whereby  one 
person  becomes  responsible  for  another  to  a  third  party  either 
for  a  debt,  or  performance  of  a  duty.  Being  a  contract  there 
must  be  a  consideration  to  make  it  vaHd. 

1281.  Warranty  may  be  either  expressed  or  impHed,. 
usually  relating  to  the  sale  of  goods  and  their  condition.  If 
expressed,  it  becomes  a  contract  in  writing,  and  therefore  re- 
quires a  consideration  to  be  valid.  If  implied  it  conforms  tO' 
the  usage  as  observed  in  trade. 

V.  Give  a  brief  definition  of :  Agent,  Assignee,  Attorney 
in  Fact,  Bailee,  Broker,  Factor,  Receiver,  Trustee. 

1282.  Agent — A  person  given  authority  to  act  for  another 
who  is  termed  the  principal. 

1283.  Attorney  in  Fact — A  person  appointed  by  a  prin- 
cipal through  an  instrument  in  writing  designated  a  power  of 
attorney. 

1284.  Assignee — A  person  to  whom  either  a  right  or  prop- 
erty is  assigned  for  the  benefit  of  others. 

1285.  Bailee — One  to  whom  personal  property  is  in- 
trusted for  a  special  purpose. 

1286.  Broker — An  agent  or  negotiator  representing  others 
either  in  buying  and  selling,  or  disposition  of  property  for  a 
consideration. 

1287.  Factor — An  agent  into  whose  hands  the  actual 
property  is  placed  by  the  owner  for  sale  or  disposition,  and  for 
which  he  is  entitled  to  compensation. 

1288.  Receiver — A  person  selected  by  the  creditors  and 
confirmed  by  a  court  of  competent  jurisdiction  to  take  charge 
of  property. 

1289.  Trustee— One  in  whose  hands  property  is  placed 
for  the  benefit  of  another. 

VI.  Briefly  describe  what  constitutes'  the  following: 
Contract,  Franchise,  Mortgage,  Power  of  Attorney,  Proxy, 
Sale. 

1290.  Contract — An  agreement  to  do  or  not  to  do  a  cer- 
tain thing. 


424  CORPORATION    ACCOUNTING 

1291.  Franchise — A  particular  right  or  privilege  conferred 
and  granted  by  competent  authority,  and  vested  in  individuals 
or  corporations. 

1292.  Mortgage — An  instrument  in  writing  conveying 
property,  under  certain  conditions,  to  secure  a  debt. 

1293.  Sale — The  act  of  selling  or  an  agreement  to  transfer 
property  from  one  person  to  another  for  a  consideration;  to 
dispose  of  for  money. 

1294.  Power  of  Attorney — An  instrument  in  writing  con- 
ferring special  powers"  whereby  one  person  is  authorized  to 
act  for  another. 

1295.  Proxy — An  instrument  in  writing,  whereby  one 
person  is  authorized  to  vote  or  act  for  another  under  certain 
expressed  conditions ;  the  person  so  authorized. 

VII.  What  is  a  Partnership?  (a),  How  is  it  formed? 
(b).  How  is  it  terminated? 

1296.  Partnership  is  the  association  by  contract  of  two 
or  more  persons,  combining  their  money,  property,  labor  and 
skill  for  the  purpose  of  carrying  on  a  business  together,  and 
dividing  the  resulting  profits  and  losses  according  to  certain 
agreed  upon  proportions'. 

1297  (a).  It  can  only  be  formed  by  the  mutual  consent  of 
all  parties  thereto,  and  subsequently  no  new  member  can  be 
admitted  without  the  approval  and  consent  of  the  existing 
members. 

1298  (b).  It  is  terminated  by  the  lapse  of  time  previously 
agreed  upon  for  its  duration;  (2),  By  the  expressed  will  of 
.any  partner  where  there  is  no'  agreement;  (3),  By  death  and 
other  unavoidable  causes. 

VII.     What  is  a  Corporation?     (a),  How  is  it  formed; 
(b).  How  is'  it  dissolved?     (c).  What  is  a  Stockholder's  right 
■as  regards  voting  and  investigation?     (d),  What  is  a  Stock- 
holder's liability? 

1299.  A  Corporation  is  an  artificial  body  authorized  by 
law  to  act  as  a  natural  person,  and  also  enjoying  the  right  of 
succession  or  continuance  regardless  of  change  in  its  member- 
ship. It  may  be  created  under  general  laws,  but  not  by  spe- 
cial act. 

1300  (a).  It  is  formed  by  the  voluntary  association  of 
three  or  more  persons'  ,a  majority  of  whom  must  be  residents 


AND    COEPOEATION    LAW  425 

of  this  State.  Its  articles  must  set  forth  its  name,  purpose, 
principle  place  of  business,  term  of  its  existence  (not  exceed- 
ing 50  years),  number  of  its'  directors  (limited  to  not  less 
than  three),  stating  their  residences,  amount  of  its  Capital 
Stock,  number  of  shares,  amount  subscribed,  and  by  whom. 

The  articles  must  be  filed  with  the  County  Clerk  where  its 
principal  place  of  business  is  located,  and  a  certified  copy  sent' 
to  the  Secretary  of  State,  who  thereupon  issues'  a  Certificate 
of  Incorporation  attested  by  his  signature  and  over  the  Great 
Seal  of  the  State. 

1301  (b).  Dissolution  is  either  voluntary,  or  involuntary. 
If  voluntary,  application  must  be  made  in  writing  to  the  Su- 
perior Court  of  the  County  where  its  principle  place  of  busi- 
ness is  located,  and  must  be  consented  to  by  at  least  two- 
thirds  of  the  members,  or  two-thirds'  of  the  holders  of  the 
Capital  Stock;  it  must  also  state  that  all  claims  and  demands 
have  been  satisfied  and  discharged. 

1302.  Involuntary  Dissolution  may  occur  through  the  ex- 
piration of  the  term  for  which  it  was  created,  or  by  quo  war- 
ranto proceedings  instituted  by  the  Attorney  General. 

1303  (c).  Every  stockholder  has  the  right  to  vote  in  per- 
son, or  by  proxy,  at  all  elections  for  Directors,  the  number  of 
shares  owned  by  him  for  each  Director  to  be  elected,  or  to 
cumulate  his  shares  and  cast  as  many  votes  for  one  or  more 
candidates,  as  the  total  number  of  his  shares  multiplied  by  the 
number  of  directors  shall  represent. 

Every  stockholder  has  the  right  to  inspect  all  the  books 
and  records,  and  take  a  copy  of  same  during  business  hours. 

Stockholders  of  mining  corporaitons  have  also  the  addi^ 
tional  right  to  make  full  examination  of  the  property  accom- 
panied by  an  expert,  and  to  take  samples. 

1304  (d).  Each  stockholder  is  individually  and  person- 
ally liable  for  such  proportion  of  all  debts  and  liabilities  con- 
tracted or  incurred  during  the  time  he  was  a  stockholder,  as 
the  amount  of  stock  or  number  of  shares  owned  by  him  bears 
to  the  whole  of  the  subscribed  capital  or  shares  of  the  corpor- 
ation. 


426  CORPOEATION    ACCOUNTING 

IX.  Draw  the  following  promissory  notes:  (a),  Nego- 
tiable; (b),  Non-negotiable;  (c),  Negotiable  not  requiring 
endorsement. 

San  Francisco,  Cal.,  June  i,  1904. 

(a).     $ 

after  date  I  promise  to  pay  to 

or  order Dollars  at 

S.  F.,  value  received. 

(Signature) 

San  Francisco,  Cal.,  June  i,  1904. 

(b).     $ 

after  date  I  promise  to  pay  to 

Dollars  at S.  F.^ 

value  received. 

(Signature) 

San  Francisco,  Cal.,  June  i,  1904. 

(c).     $ 

after  date  I  promise  to  pay  to 

or  bearer Dollars 

at S.  F.,  value  received. 

(Signature) 

X.  What  is  meant  by:  (a).  Common  Stock;  (b).  Pre- 
ferred Stock;     (c).  Cumulative  Preferred  Stock. 

(a).  Common  Stock  is  the  usual  Capital  Stock  issued  by  a 
corporation,  the  holders  of  which  have  vested  rights  in  the 
assets  and  earnings.  It  also  carries  voting  privileges  regu- 
lated by  the  state  laws. 

(b).  Preferred  Stock  is  a  form  of  Capital  Stock,  the  hold- 
ers of  which  have  prior  rights  to  stated  dividends  (if  earned) 
before  the  common  stock  can  participate. 

(c).  Cumulative  Preferred  Stock  is  an  issue  of  Capital 
Stock  entitling  the  holders  to  a  specified  dividend.  In  case 
the  earnings  are  not  sufficient  to  meet  the  stated  dividend, 
it  becomes  a  liability  against  the  corporation  accumulating 
as  the  term  applies. 


AND    COEPORATION    LAW  427 

Practical  Accounting. 
Time  allowed  :     Four  hours. 

I.  John  Failure  has  made  an  assignment  for  the  benefit 
of  his  creditors. 

The  Accounts  have  been  adjusted  in  accordance  with  an 
appraisement,  and  the  following  condition  of  his  business 
ascertained  : 

Cash  in  Bank  $2,000.00 

Customers'  Accounts:    $1,500  good;  $700  doubtful, 

but  estimated  to  produce  $500;  $350  worthless  $2,550.00 
Notes  Receivable;  $1,400  secured;  $850  unsecured 

but  good  2,250.00 

Merchandise,   Inventory  $21,700,   but   actual   value 

estimated  at  $17,000  21,700.00 

Securities :  $3,000  in  hand ;  $4,000  pledged  to  par- 
tially secured  creditors';  $5,000  held  by  secured 
creditors  12,000.00 

Fixtures,  considered  worth  $400  800.00 

Creditors  unsecured  22,400.00 

Creditors  partially  secured  26,000.00 

Creditors  fully  secured  4,500.00 

Wages  due  preferentially  1,100.00 

Expenses .  .  3,570.22 

Trading  Loss  5;62g,78 

John  Failure,  Investment  10,000.00 

John  Failure,  Withdrawals  13,500.00 

Prepare  a  Statement  of  Affairs,  to  exhibit  the  Assets  and 
Liabilities  with  respect  to  realization  and  liquidation;  also  a 
Deficiency  Account  to  exhibit  in  detail  the  insolvency. 

N.  B.  The  answer  to  this  question  appears  on  the  next 
page. 

II.  The  following  facts  appear  concerning  a  transaction 
of  the  Farallone  Bank  : 

The  Bank,  by  acts  of  the  Cashier,  has  loaned  various  sums 
of  money  to  John  Trickey,  bearing  interest  at  10  per  cent  per 
annum,  compounded  monthly.  Principal  and  accrued  interest 
amount  to  $900,000  on  June  i,  1904. 

Trickey  offers  9,000  shares  of  Mining  Stock  in  full  settle- 
(Continued  on  page  429.) 


428 


CORPOEATION    ACCOUNTING 


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AND    COEPOEATION   LAW  429 

♦ 

ment  of  the  indebtedness,  which  the  Bank  accepts  and  re- 
ceives on  June  i,  1904. 

The  Directors  of  the  Bank  subsequently  learn  that  of  the 
loans  made  to  Trickey,  the  sum  of  $250,000  was  paid  by 
Trickey  to  the  Cashier  upon  a  personal  indebtedness,  then  re- 
pudiate the  loans  of  $250,000  as  to  Trickey,  and  claim  same  as 
against  the  Cashier  personally. 

The  interest  upon  these  loans  of  $250,000  at  10  per  cent 
per  annum,  compounded  monthly,  amounts  to  $145,000,  while 
the  interest  thereon  at  the  legal  rate  of  7  per  cent  per  annum, 
applicable  in  the  absence  of  agreement,  amounts  to  $110,000. 

The  Directors  demand  of  the  Cashier  the  payment  of  $395,- 
000  for  the  transfer  to  him  of  3,950  shares';  the  Cashier  refuses, 
but  offers  to  pay  $380,000  as  of  June  i,  1904,  for  the  transfer 
of  the  entitlement  to  stock  therefor. 

How  many  shares  of  stock  should  the  Cashier  receive  for 
the  payment  of  $380,000? 

The  Cashier  offers  to  pay  $380,000  which  is  $20,000  in  ex- 
cess of  the  amount  he  can  be  sued  for  on  $250,000  plus  interest 
at  7%  per  annum  ($110,000)  amounting  in  all  to  $360,000; 
therefore  as  the  Company  have  settled  with  Trickey  on  the 
basis  of  interest  at  the  rate  of  10%  per  annum,  compounded 
monthly,  the  Cashier  is  entitled  to  participate  in  the  increment 
pro  rata ;  that  is,  for  the  amount  owing  by  him  viz :  $360,000, 
he  is  entitled  to  395-900,  representing  principal  $250,000  and 
interest  $145,000.  Again,  as  he  offers  to  pay  an  added  sum  of 
$20,000  over  and  above  all  legal  claims  that  could  be  sued  for 
as  against  him,  he  is  further  entitled  ^  20-900  shares  addi- 
tional, making  altogether  4150  shares  due  to  the  cashier. 

$360,000=395-900  or  3,950  Shares 
Plus       20,000=  20-900    "      200 


Due  to  Cashier     4.150 


III.  Brown,  Green,  Black  and  White  form  a  partnership 
on  June  i,  1903.  Capital  is  contributed  by  Brown,  $20,000; 
Green,  $18,000;  Black,  $12,500,  and  White  ,$9,500.  The  Profits 
and  Losses  are  to  be  divided  in  the  ratio  of  these  contributions. 
On  May  31,  1904,  the  Trial  Balance  shows  as  follows: 


430  CORPORATION    ACCOUNTING 


Brown,  Capital 

$20,000.00 

Green,  Capital 

18,000.00 

Black,  Capital 

12,500.00 

White 

9,500.00 

Cash 

$3,480.28 

Merchandise 

52,190.05 

Fixtures 

2,940.00 

Accounts  Receivable 

24,082.75 

Patent  Right 

2,000.00 

Real  Estate 

9,000.00 

Accounts  Payable 

16,308.64 

Demand  Notes  Payable 

25,000.00 

Mortgage  Note  (on  the  Real 

Estate) 

4,000.00 

Wages  and  Salaries 

4,560.00 

Discount  on  Sales 

1,240.90 

Discount  on  Purchases 

1,392.80 

General  Expenses 

3,800.44 

Commission 

2,755.40 

Interest 

792.00 

Brown,  Personal  Drawings 

1,980.00 

Green,  Personal  Drawings 

1,242.00 

Black,  Personal  Drawings 

2,148.50 

$109,456.84    $109,456.84 

Merchandise  Account  represents  Purchases  of  $142,784.30; 
Sales,  $89,542.28;  Rebates  on  Purchases,  $2,472.10,  and  Allow- 
ances to  Customers,  $1,420.13.  Inventory  Value  May  31,  1904, 
is  $73,669.37.  Office  rent,  $100,  has  been  paid  in  advance  for 
June,  1904.  Unexpired  insurance  premiums  amount  to  $74.00. 
Accrued  interest  on  Demand  Notes  to  May  31,  1904,  is'  $375.00. 
It  is  agreed  that  depreciation  of  25  per  cent  on  Fixtures  shall 
be  charged,  that  valuation  of  Patent  Right  shall  be  increased 
to  $3,000.00,  that  a  Reserve  Fund  of  2^  per  cent  of  the  Ac- 
counts Receivable  shall  be  created  to  provide  for  loss'  in  col- 
lection, that  interest  shall  be  allowed  to  all  partners  on  Capital 
Accounts  at  3  per  cent  per  annum,  and  that  a  salary  shall  be 
allowed  to  White  of  $1,200.00. 

Prepare  a  Trading  Account,  Profit  and  Loss  Account,  and 
Balance  Sheet  as  of  May  31,  1904;  also  separate  statements 
of  the  Partners'  Accounts'.  Present  the  Operating  Statements 
in  all  detail  possible  with  the  information  at  hand,  and  show 
the  percentage  of  Gain  or  Loss  per  Trading  Account,  and  of 
Gain  or  Loss  per  Profit  and  Loss  Account  on  the  basis  of  the 
cost  of  the  Merchandise  sold. 


AND    CORPOEATION    LAW 


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434  COEPOKATION    ACCOUNTING 

IV.  The  following  Trial  Balance  is  a  correct  statement  of 
the  balances"  brought  down  in  the  ledger  of  Messrs.  Trust  and 
Suffer  on  December  31,  1903,  by  John  Trusted,  the  Cashier 
and  Bookkeeper,  before  his  sudden  departure : 


Cash 

$  900.00 

Capital 

$75,000.00 

Merchandise 

68,000.00 

Accounts  Receivable 

41,600.00 

Nail  Co.  Stock 

5,000.00 

Notes  Payable 

32,000.00 

Purchase  Creditors 

26,500.00 

Expense 

14,700.00 

Mr.  Trust,  Personal 

7,300.00 

Mr.  Suffer,  Personal 

4,000.00 

Totals  $137,500.00    $137,500.00 

The  Inventory  Value  is  found  to  be  $52,000.  The  closing 
entries  are  deferred,  and  a  complete  audit  is  made,  which  con- 
firms the  above  balances  as  to  receivables  and  payables  to  be 
actually  existing,  and  that  the  accounts  are  correct,  with  the 
following  exceptions : 

Cash — Debit  footing  short  $2,000;  credit  footing  over 
$1,000;  false  charges  to  Expense  of  $3,000  in  Cash  Book. 

Merchandise — False  debit  entry  of  $20,000  in  Ledger. 

Accounts  Receivable — False  credit  entry  of  $5,000,  and  ex- 
cess credit  footing  $2,000  in  Ledger  representing  unentered 
collections. 

Notes  Payable — False  credit  entry  of  $6,000,  and  short 
debit  footing  $3,000  in  Ledger,  representing  Notes  issued 
without  accounting  for  the  proceeds. 

Sales  Book — Sales  of  $1,000  to  Accounts  Receivable  not 
posted  to  debit,  but  collected  in  full. 

Draft  the  entries  to  properly  adjust  and  close  the  accounts, 
constituting  an  account  against  John  Trusted  for  the  total  de- 
falcation, but  without  asset  value.    Present  the  Balance  Sheet. 


Adjustment  Account 

To  Merchandise  Account 

False  debit  in  Ledger. 

Sundries 

To  Adjustment  Account 

Cash 

Dr.  footing  C.  B.  short 

$2,000 

Cr.  footing  C.  B.  over 

1,000 

Accounts  Receivable 

False  Cr.  entry  in  Ledger 

5,000 

Excess  Cr.  footing  Ledger 

2,000 

Sales  not  posted 

1,000 

Notes  Payable 

False  Cr.  entry  in  Ledger 

6,000 

Short  Dr.  footing  Ledger 

3,000 

AND    COEPOEATION    LAW  435 

Adjusting  and  Closing  Entries. 

$20,000 

$20,000 

$20,000 
3,000 


8,000 


9,000 

John  Trusted  Defalcation  $23,000 

To  Sundries 

Expense  3,000 

Abstraction  per  false  charge  in  C.  B. 
Cash 

Abstraction  per  C.  B. 
Dr.  footing  short  $2,000 

Cr.  footing  over  1,000  3,ooo 

Accounts  Receivable 
Abstraction  of 

Collection  of  Accts.  unentered       7,000 

Collections  of  Sales  not  charged     1,000  8,000 

Notes  Payable 
Abstraction  of  proceeds  of  notes' 

issued  but  unentered  9,000 

Merchandise  $4,000 

To  Profit  and  Loss  4,000 

Trading  Gain,  Excess  Inventory 
$52,000  over  Acct.  balance  $48,000 

Profit  and  Loss  $34,700 

To  Sundries 

Expense  11,700 

transfer  of  balance. 

J.  Trusted  Defalcation  Reserve  23,000 

To  provide  for  total  loss  sustained 
by  dishonesty  of  John  Trusted. 


436  COEPOHATION    ACCOUNTING 

Capital  $30,700 

To  Profit  and  Loss  30,700 

Impairment  of  Capital. 

Balance  Sheet. 
Assets. 

Cash  $     900 

Accounts  Receivable  41,600 

Mr.  Trust  Personal  7,300 

Merchandise  52,000 

Nail  C.  Stock  5,ooo 

John   Trusted    Defalcation  debit  $23,000 

"            "             "  Reserve  credit    23,000             o       $106,800 

Liabilities. 

Notes  Payable  $32,000 

Purchase  Creditors  26,500 

Mr.  Suffer  Personal  4,000 

Capital  44,300       $106,800 

V.  A  Corporation  is  formed,  and  places  a  certain  number 
of  shares  of  its  capital  stock  (par  value  $1.00  per  share)  on 
the  market,  to  be  sold  at  35  cents  per  share,  w^ith  the  under- 
standing that  there  is  to  be  no  forfeiture  of  any  money  paid 
in,  but  if  the  subscriber  becomes  delinquent  for  any  instal- 
ment, a  pro  rata  number  of  shares  equal  to  the  amount  of  the 
instalment  shall  immediately  revert  to  the  company. 

"A"  subscribes  for  1,000  shares  and  pays : 

Installment  No.  i,  123^  cents. 
"  No.  2,  5  cents. 

Then  transfers  his  interest  to  "B,"  who  does  not  pay : 

Instalment  No.  3,  2^  cents. 
"  No.  4,  2%  cents. 

"  No.  5,  7>^  cents. 

But  does  pay : 

Instalment  No.  6,  5  cents. 


AND    COEPORATION    LAW  437 

How  many  shares  is  "B"  entitled  to,  and  in  the  aggregate 
how  much  do  "A"  and  "B"  pay  to  the  Company? 

"A"  having  paid  the  first  and  second  intsalments  amount- 
ing to  I73^c  per  share  on  looo  shares'  to  be  sold  at  the  value 
of  35c  per  share,  it  is  self  evident  that  if  neither  he,  nor  his 
successor  in  interest  paid  any  more  instalments,  he  would  be 
entitled  to  receive  from  the  company  500  shares,  as  being  the 
equivalent  of  what  he  had  paid,  there  being  a  stipulation  that 
there  should  be  "no  forfeiture  of  any  money  paid  in,"  conse- 
quently when  the  third  instalment  of  2i^c  is  called  for,  there 
would  be  due  $25.00  on  1000  shares,  which  with  the  amount 
already  paid  in,  viz.,  I7%c  would  make  the  stock  worth  20c 
per  share.  This  amount  divided  into  $25.00  would  represent 
125  shares,  and  "B"  having  failed  to  pay  the  instalment,  for- 
feits that  number  of  shares"  to  the  company,  which  had  been 
previously  debited  to  him  at  the  rate  of  35c  per  share — he 
would  of  course  then  have  to  receive  a  corresponding  credit 
to  his  account  at  the  same  rate,  viz:  125  shares  at  35c  per 
share=$43.75.  The  same  amount  by  Journal  entry  would  be 
then  debited  to  Forfeited  Shares  Account  and  any  further 
disposition  of  forfeited  stock  would  be  to  the  credit  of  this 
account  and  the  debit  of  subsequent  purchaser  at  the  full  rate 
of  35c  per  share;  but  naturally  the  purchaser  would  only  be 
called  upon  to  pay  the  aggregate  amount  of  instalments  paid 
up  to  date  of  his  purchase,  and  he  would  be  liable  for  the  bal- 
ance as  called  for,  consequently  "B's"  account  would  now  rep- 
resent 875  shares,  on  which  he  would  owe  $131.25. 

The  fourth  instalment  of  23/^ c  due  by  ''B"  would  be  levied 
on  his  875  shares  and  amount  to  $21.87%,  ^^^  the  stock  would 
now  be  worth  225^ c  per  share. 

Following  the  same  methods  as  before  described,  this 
amount,  viz:  22^ c  divided  into  $21,871^  would  forfeit  97  2-9 
shares  to  the  debit  of  Forfeited  Share  Account  at  the  rate  of 
35c  per  share=$34.02  7-9  to  the  credit  of  "B,"  the  remaining 
shares  due  to  him  being  yyy  7-9. 

The  fifth  instalment  at  7>4c  per  share  on  yyy  7-9  shares= 
$58.33,  stock  at  that  time  being  worth  30c,  which  divided  into- 


438  COBPOEATION    ACCOUNTING 

the  foregoing  amount  would  forfeit  194  4-9  shares  which  at 
35c=$68.04  5-9  deibetd  and  credited  as  before. 

"B"  would  now  have  forfeited  416  2-3  shares  representing 
$145.83  1-3  and  there  would  remain  to  "B"  583  1-3  shares  upon 
which  he  pays  the  6th  instalment  at  5c  amounting  to  $29.16  2-3. 

In  this  way  the  books  are  always  kept  in  balance  and  the 
Forfeited  Stock  comes  back  for  further  disposition  at  the  same 
price  it  was  originally  disposed  of. 

In  illustrating  this  problem  ,the  answer  has  been  worked 
out  to  fractions  of  cents  and  also  of  shares,  but  of  course  in  a 
business  way,  it  would  be  sufficiently  accurate  to  dispose  of 
all  fractions  where  the  amounts  exceed  one-half  and  consider 
it  as  a  whole  number. 

Second  Method. 

"A"  has  paid  $175  on  the  total  purchase  price  owing  by 
him  of  $350,  consequently  he  is  entitled  to  500  shares  without 
any  further  payment.  The  third  instalment  of  2I/2C  being  de- 
linquent, acocrding  to  the  terms  of  the  subscription  a  propor- 
tionate number  of  shares  must  revert  to  the  company  equal  to 
the  amount  of  the  delinquent  instalment,  consequently  he 
could  not  hold  any  more  stock  than  represents  the  equivalent 
of  the  instalments  paid  and  due,  therefore  the  levy  of  the  third 
instalment  makes  the  stock  20c  in  value,  and  as  he  has  already 
paid  $175.00,  equal  to  875  x  20c,  he  has  remaining  to  his  credit 
875  shares,  and  consequently  must  forfeit  125  shares  to  the 
company. 

When  the  fourth  instalment  is  levied,  the  price  of  the  stock 
becomes  worth  22I/2C  which  divided  into  $175^777  7-9  shares, 
which  he  is  entitled  to  retain,  and  results  in  a  further  for- 
feiture by  him  of  97  2-9  shares.  Again  when  the  fifth  instal- 
ment of  7^c  is  levied  the  value  becomes  30c  which  divided 
into  $175=583  1-3  shares  and  a  further  forfeiture  of  194  4-9 
shares  is  necessary.  When  the  last  instalment  is  called  for  at 
5c  per  share,  he  has  only  remaining  to  his  credit  583  1-3  shares', 
upon  which  he  pays  $29.16  2-3  and  this  amunot  plus  $175 
equals  $204.16  2-3  or  the  value  of  the  last  number  of  shares 
at  35c  per  share. 


AND    COKPOEATION    LAW 


430^ 


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AND    CORPORATION   LAW  441 

VI.  John  Doe  owns  a  lumber  and  mill  business  with  prop- 
erty value  as  follows : 

Real  Estate,  $100,000. 

Plant,  etc.,  $79,000. 

Lumber,  $93,500. 

Doe,  Smith,  Brown,  Jones  and  Robinson  organize  a  cor- 
poration with  an  authorized  capital  of  $1,000,000,  divided  into 
10,000  shares  of  par  value  $100  per  share,  under  the  following 
conditions : 

Doe  is  to  receive  1,000  shares  for  real  estate,  790  shares  for 
plant,  and  935  shares  for  lumber — fully  paid  up  stock. 

Smith  subscribes  for  1,500  shares*. 

Brown  subscribes  for  1,500  shares. 

Jones  subscribes  for  1,500  shares. 

Robinson  subscribes  for  775  shares. 

One  thousand  shares  is  to  be  placed  in  Treasury  for  future 
disposition,  and  200  shares  fully  paid  up  stock  is  to  be  given 
to  each  incorporator  for  the  cash  payment  of  10  per  cent  of 
par  value,  in  consideration  for  services  in  the  organization  of 
the  company.  Each  incorporator  then  donates'  100  shares  to 
the  company  for  sale  to  produce  working  capital. 

Draft  the  entries  required,  and  present  resulting  Trial  Bal- 
ance. 

Journal  Entries. 

Sundries'  Dr. 

To  Capital  Stock  $1,000,000 

John  Doe,  1000  shs.  for  R.  E.  $100,000 
790  shs.  for  Plant  79,000 
935  shs.  for  Lumber  93,500       $272,500 


Subscription  Account 

Smith,  1,500  shs.  @  $100  $150,000 

Brown,  1,500  shs.  @  $100  150,000 

Jones,  1,500  shs.  @  $100  150,000 

Robinson,  775  shs.  @  $100  77,500         527,500 


Treasury  Stock 

1,000  shs.  held  for  future  disposition  100,000 


442  CORPOEATION    ACCOUNTING 

Promotion  Account 

i,ooo  shs.  issued  to  the  following 
named  persons'  for  services  inci- 
dent to  organization. 

Doe,  200  shs  $20,000 

Smith,  200  shs.  20,000 

Brown,  200  shs.  20,000 

Jones,  200  shs.  20,000 


Kobmson,  200  shs. 

20,000 

100,000 

$1,000,000 

Sundries  Dr. 

To  John  Doe 

For  various   properties 

transferred 

to  the  Company. 

Real  Estate 

$100,000 

Plant,  etc. 

79,000 

Lumber 

93.500 

272,500 


Treasury  Stock  Dr.  50,000 

To  Donation  Account  50,000 

Donation  of  100  shs.  from  each  of 

the  following  parties  to  be  sold 

at  par  for  Working  Capital. 
Doe,  100  shs.  @  $100  $10,000 

Smith,  100  shs.  @  $100  10,000 

Brown,  100  shs.  @  $100  10,000 

Jones,  100  shs.  @  $100  10,000 

Robinson,  100  shs.  @  $100     10,000 

Dr.  Cash  Account. 

Promotion  Account  Received  from 

John  Joe,  10%  on  200  shs.  @  $100  $2,000 
Smith,  10%  on  200  shs.  @  $100  2,000 
Brown,  10%  on  200  shs.  @  $100  2,000 
Jones,  10%  on  200  shs.  @  $100  2,000 
Robinson,     10%  on  200  shs.  @  $100        2,000         $10,000 


AND    COEPOEATION    LAW  443 

Trial  Balance. 


Capital 

$1,000,000 

Subscription 

$527,500 

Treasury 

150,000 

Promotion  (P  &  L) 

90,000 

Real  Estate 

$100,000 

Plant,  etc. 

79,000 

Lumber 

93,500 

Donation  Account  (P  &  L) 

50,000 

Cash 

10,000 

$1,050,000    $1,050,000 


INDEX, 

N.  B.     The  numbers  refer  to  paragraphs — not  pages. 

Caution :  Readers  are  cautioned  when  looking  up 
points  of  law  to  note  carefully  the  State  in  which  they  apply, 
and  business  men  and  lawyers  are  especially  referred  to  par- 
agraph 217. 


"A  Boom/'  1155. 

"A  Corner,"  1158. 

"A  Flurry,"   1156. 

"A  Panic,"  1157. 

"A  Point,"  1140. 

"A  Pool,"   1157. 

A  Corporation  Defined,  1. 

Abatement,   1101. 

Abstract  of  Sales,  530-532. 

Abusing  extra  columns,  511. 

Acceptances,  1045. 

Accepting  the  Charter,  8. 

Account, 

Controlling,    423-523-1236. 

Expense,  412. 

Expense   anticipated,   413(a). 

Expense  organization,  717,  719,  724. 

Expense   prepaid,   413. 

Franchise,  415. 

Goodwill,  416. 

Impairment,    425. 

Income,  408. 

Investment,    434-436. 

Manutacturing,  422. 

Patent,  417. 

Profit  and  Loss,  410,  1231. 

Realization    and    Liquidation,    430, 
433. 

Revenue,  405-921. 

Royalty,  613-614. 

Surplus,  404. 

Suspense,  411. 

Trading,  419. 
Accounting  for  Coupons,  330  to  333. 

For  bond  interest,  327. 

For  royaxty,   613-614. 
Accountancy — past  and  present,  1208. 
Accretion,    Capital,   308. 

Revenue,  308. 


Accrued  Bond  Interest,  325. 

Wages,  564  to  566. 
Accurate  interest,  1093-1094. 
Acquiring  property  by  bequest,   72. 
Act   of  Board — Corporate  act,  73. 
Active  Assets,  444. 
Adjourned  Meeting,  145. 
Adjusting   partners'    interests,    1017. 
Adjustment  Bonds,  339. 
Admitting  Stockholders,  15,  22. 
Adopting  By-laws,  137,  226. 
Advantages  of  Corporations,  12  to  21. 
Adv.   assessment  and  sale,  53. 
Agent,   1282. 
Aliquot   parts,    1099. 
Allotments,   how  made,   469. 
Altering   Number   of   Directors,   29. 

Seal,  22-29-72. 

By-laws,  75,  140,  227. 
Amalgam  Account,  561  to  563. 
Amending    articles    of    incorporation, 
135-213. 

By-laws,  140,  227. 
Amortization,   372   to   388. 
Annual   Election,   36. 

Statement,  587,  588,  735. 
Annuities,  379  to  383. 
Appointing   Officers   and   Agents,   22- 

29-72. 
Appreciating  Assets,  447. 
Arbitration,  1279. 

Arizona  corporation  laws,  100  to  127. 
Articles    of    Incorporation,    32,    104, 

133,  207,  210. 
Assenting  Stock,  315. 
Assessing   Paid-up   Stock,   778. 
Assessments,  53,  81,   161   to   187-458. 
Assessment, 

Account,    787-881. 

Book,  765,  766. 

Expense,  770,  795,  803. 


Assets, 

Active,  444. 

Appreciating,    447. 

Capital,  443. 

Cash,  445. 

Circulating,  444. 

Current,    444. 

Diminishing,   445(a),  446. 

Floating,   444,    1238. 

Fixed,  443. 

Permanent,  443,  527,  1237. 

Quick,  445. 
Assignee,    1284. 
Assigning     subscription     rights,     703 

to   712. 
Assignment  of  Bonds,  326. 
Attorney  in  fact,  1283. 
Audited,  Vouchers,  524. 
Auditing,  1246  to   1270. 

Banks,  1076  to  1078,  1256  to  1264. 

B.  and  L.  Association,   1265. 

Insurance  Company,  1266. 
Auditor's  Certificate,   1269,  1270. 
Authority  to  bind  corporation,  17. 

B 

"B  Flat,"  1169. 

Bad    assets,    1239. 

Bailee,    1285. 

Balance  Ledger,  515,  516, 

Balance  of  Advantage,  20(b). 

Of   trade,   1037. 

Sheet,  440,   1225. 
Ballots,   234,  235. 
Banking,  1032  to  1104. 
Bank 

Circulation,  1079,  1081,  1082. 

Examinations,    1076   to    1078,    1256. 

Organization,    1048. 

Statement,  page  300  to  362. 
*'Bears,"   1137. 
Best  form  of  Books,  267  et  seq. 

of  Certificate,  264,  265. 

of  Stock  ledger,  278,  281,  282. 
Bills  of  Exchange,  1036. 

of  lading,  1044. 

of   sale  and  warranty,   857. 
Books  open  to  Stockholders,  112. 
Bonds, 

Adjustment,   339. 

Bottomry,    347. 

Coupon,  325. 

Car  Trusts.  335. 

Collateral   Trust,   336. 

Convertible,  49,  349. 

Consolidated  Mortgage,  340. 

Debenture,  343. 

Deferred,   346. 

Equipment,   334. 

Gold,  351. 


Bonds, 

Government,    352,    1132. 

Income,  342. 

Land  Grant,  337. 

Mortgage,   324. 

Municipal,  355. 

Prior  Lien,   338. 

Registered,  325. 

Refunding,  341. 

Respondentia,   348. 

State,  354. 
Bonds  and  Mortgages,  30,  192,  745. 
Bond 

Account,    320. 

Discount,  320. 

Dividend,   501. 

Interest,  325   to   329. 

Interest,  accrued,  325. 

Premium   account,   320,   321,   386. 

Problems,   357   to  365. 

Values,  356. 
Bondholders  may  examine  books,  82. 

have  right  to  vote,   82. 
Bonus,  305,  457,  820,  909. 

Account,   820(a). 
Bound  by  Subscription,  52,  244,  245. 
Broker,   1286. 
Brokers*    opportunities,    1113. 

Profits,   1107,   1111. 
"Bucket    shop,"    1154. 
"Bulls,"    1136. 
"Busy  Bees,"   1151. 
"Buyer's  option,"   1159. 
Buying  and  Selling  credits,  1047. 
By-Laws,  22,  29,  33,  73,  137,  138. 

Amended  and  Repealed,   140. 

In  extended  form,  222  to  224. 


California   Corporation   Laws,   128  to 
220. 

Provisions,  227. 
"Calls,"  1142. 
Calling  first  meeting,  40. 
Capital,   288,    1228. 

Accretion,  308,  832. 

Assets,  443. 

Liabilities,  400,  448. 

Expense,   452. 

Losses,  453. 

Receipts,   451. 

Dividends,   1023. 

Negatives,  838. 

Stock,  288,  289. 
Capital  as  a  Trust  Fund,  21(b) 
Capitalizing   franchise,   415. 

Future,  842. 

"Goodwill,"   416,   716. 
Capital  vs.   Revenue  Eicpense,  452. 
Car  Trusts,  335. 


Caring  for  stock  contracts,  255. 
Cash  assets^  445. 
Cause  for  disincorporation,  121. 
Certificates,  31,  32,  70,  82,  86,  256. 
Certificate  ci  stock,  158,  250,  290. 

Of  consent  to  mortgage,  319. 
Changing  corporate  name,  197. 
Chattel  Mortgage,  56. 
Choosing   Directors,  36,  87. 
Circulating  Assets,  444. 
Circulation,  Bank,  1079  to  1082. 
Clandestine  Stock,  314. 
Classification   of   banks,   1134. 
Classifying  Directors,   77. 
Clearing   House,    1058. 
Close  Corporation,  6. 
Closing  entries,  560  to  570. 

Partnership    books,    852. 

Reserve    account,   921. 
Collateral   security,   41. 

Transfer,  83. 

Trust  bonds,  336. 
Commencing   business,    136. 

With  snrphis,   104,   136,  753,   1085. 
Commercial   law,    1271    to    1304. 
Common  stock,  49^  291. 
Compelling    declaration    of    dividend, 

44. 
Compound   interest,   358  to   365,  377. 
Computing     bank     reserve,     1054     to 

1064. 
Consolidated  mortgage   bond,   340. 

Bond  issue,  340,  493. 
Consols,  353. 

Consolidations,  212,  922  to  989. 
Consolidating        Corporations,        922, 

1005. 
Conditional    subscription,    245. 
Contingent  liability,   450. 

Fund,   392,   403. 
Constituent  companies,  1004. 
Contract,  1290. 

For   stock.   252. 
Convertible  bonds,  349. 
Converting  coupon   bonds,  325. 

Stocks,   350. 
Controlling   account,  423,   523,   1236. 
Contracting   debts   in   another  name, 

10. 
^'Corner,"   1158. 
Corporate    act,   73. 

Existence,   33,   70,   117,   132. 

Officers,    38. 

Powers,  22.  29,  31,  32,  72,  74,  101, 
103,  188. 

Seal,    10(a). 
Corporation, 

Aggregate,  2. 

A  legal  fiction,  1. 

Educational,  5. 


Corporation, 

Defined,  1. 

Eleemosynary,   5. 

I'or  profit,  5. 

Municipal,  4. 

Private,  58. 

Public,  4. 

Public   service,   4. 

Sole,  2,  3. 

Theological,  5. 

Quasi  public,  4. 

Advantages   of.  12   to  21.  '^^ 

Disadvantages    of,    21(b). 

Bids  in  stock,  792  to  805. 

Goes  into  partnership,  1006,  1017. 

How  formed,  7,  23,  69. 

Must   recognize  transfer,   161. 

Non-existent,    43. 

Post-existent,    93. 

Reorganization,    18. 

Without  capital  stock,  5. 
Conversion    of   partnership,    849,   921. 
Cost  accounting,  421. 
Coupons,   331   to   333,  358,  361. 
Coupon   Bonds,   325. 
Course  of  exchange,  1038. 
Court  of  Chancery,  60,  94. 
C.  P.  A.  movement,  1215. 

Examinations,  1221  to  end. 

Laws,   1219. 
Creating   mortgage    indebtedness,    30. 

Reserve  fund,  621  to  626. 

Sinking  fund,  372  to  379. 
Cumulative  dividends,  44,  84. 

Preferred  stock,  48,  296. 

Voting,  37,   80,   145,  227. 
Curbstone  broker,    1153. 


Daily  abstract  of  sales,  532. 

Reserve    statement,    1064. 

Statement  liabilities,  544  to  546. 
"Dead  duck,"  1162. 
Deceased  person's  stock,  146. 
Decreasing  capital  stock,  191,  474  to 

483,   734. 
Debenture  bonds,  343  to  345. 
Defects     and     advantages     of     state 

laws,  24. 
Deed   of  trust,   319. 
Deferred   bonds,   346. 

Stock,  48,  300. 
Definition  of  treasury,  303. 

Of  watered  stock,  '312,  313. 
Deficiency  account,  426  to  429,  1232, 

1233. 
Delegating  powers,   45. 
Delinquent  sale,  53,  91,  174  to  183. 
Delaware  corporation  laws,  66,  99. 


Delivery   of   stocks   and   bonds,    1114 

to   1135. 
Demurrage,   1273. 
Design  of  stock  ledger,  277. 
Depreciation  account,  308  to  400. 

Fund,  393. 
Department  store  accounting,  521, 545 
Diminishing  assets,  445,  446. 

Value,   Theory  of,  394,  397. 
Direct  Posting,  508. 
Directors, 

Are  agents,   12,   13. 

Duties  defined^  12,  37. 

Delegate  powers,  45,  77. 

Fix  reserve^  45. 

Meetings,  221. 

Must  be  stockholders,  1236. 

Removed  from   office,   12,   149. 

Powers,  12,  32,  53,  73,  78. 

Term  of  office,  36. 

Dissenting  are  relieved,   151. 

Liabilities,  32,  44,  79,  151. 
Discount,  1101. 

False,    1104. 

True,    1103. 
Discounting  notes,   1045, 
Disadvantages  of  partners,  12  to  21. 

Of    corporations,    21(b). 
Dissolving    Corporations,    22,    29,    54, 
72,  93,  111,  122,  198,  217. 

Partnership,    15. 
Dividends,  44,  59,  78,  484  to  505. 

Bond,  501. 

Capital,  1023. 

Contingent   on   being   earned,   44. 

Fictitious,    502. 

Instalment,   489. 

Stock,  497. 

Receipt  book,  505. 
♦•Dividend  on,"  1165. 
Dissolution   and   liquidation,   1018   to 

1030. 
Displaying    corporate   name,    36,    81. 
Dispensing  with  stock  journal,   213. 
Dissertation    on   stock   discount,    654, 

657. 
Donation   account,   680. 
Donated  stock,  665  to  682. 
Donating  stock,  694,  715. 
Double  liability,  462,  1052. 
Doubtful  accounts,  893. 
Drawing  of  articles,  105,  211. 
Dummy   directors.   203(a). 

Incorporators,   203(a). 
Duties  of  accountants,   1268. 

Of  auditors,  1246  to  1249,  1268. 


Effluxion    of    time    causes    deprecia- 
tion, 394. 


Elections,   36,  37,  80,  142,  145. 

Postponed,   147. 
Eleemosynary   corporations,    5. 
Employees  have  first  lien,  55,  56. 
Enabling   powers   extend   to   agency, 

73. 
Entries  for  repurchase  of  stock,  794. 
Equity,  1274. 

Equitable  owners  of  stock,  157. 
Equipment  bonds,   334. 
Escrow,   1275. 

Essence  of  every  contract,  260. 
Estate  incorporations,  748  to  761. 
Evidence  of  right  to  vote,  37,  81. 
Evolving   a    corporation,    202. 
Examining    corporations,    166. 
Exchange  department,  535. 
Ex-Coupon,    1167. 
Ex-dividend,  1166. 
Executive   committee,   45,   77. 
Executors'   accounts,   749. 
Expense  account,  412. 

Anticipated,    413(a). 

Prepaid,  413. 
Extending     corporate     existence,     99,^ 
109,   217. 


Facilities   for  Borrowing,    14. 

Factor,   1287. 

Failure  to  hold  meeting,  77. 

To  pay  assessment,  53,  91. 
False  discount,   1104. 
Fees   and  taxes,   63,   64,  97,  98,   ^-o, 

194. 
Fictitious   dividends,   502. 

Surplus,   724. 
Fiduciary   agent,   80. 
Figuring  interest,  1088  to  1100. 

Lawful  reserve.  1054  to   1062. 
Filing  Articles  of  incorporation,   134, 

213. 
Filling  vacancies,  39,  144. 
"Fill  or  Cover,"  1160. 
First   lien  on   stock,  55,  56. 

Meeting,  71,  220,  221. 

Mortgage  bonds,   324. 
Floating  assets,  444,  1238. 
"Flurry,"   1156. 
Fixed  assets,  443. 

Charges,  413(a),  414. 

Expense,  414. 
Fixing  limit  of  indebtedness,  105. 

Reserve   of  profits,  45,  78. 
Foreign   corporations,   42,   43,   62,   96,. 
199,    1171    to   1216. 

Exchange,  1040. 

Bills  of  exchange,  1036. 
Forfeited   shares,   account,   692^. 

Stock,  684. 


Forfeiting   Charter,   114. 
Forfeiture  of  Stock,  92. 
Founders'  Shares,  48,  316. 
Form    of    articles    of    incorporation, 
209,  210. 
By-laws,  222  to  224. 
of   certificate,   256. 
Deficiency    account,    428. 
Endorsement,   253,   257. 
Instalment    scrip,    251. 
Preferred   certificate,   295. 
Proxy,  228  to  233. 
Roll  call,  238. 

Realization    and    liquidation    ac- 
count, 432. 
Tally  sheet,  240,  z41. 
Transfer,  257,  258. 
Book,  284. 
Forming   a    "corporation,"    7,   23,    68, 
69,   101,   202. 
A  selling  agency,  992. 
Forty    corporations    unified,    900    to 

1005. 
Franchise,  415,  683,  1291. 

Account,  415,  683. 
Fraudulent  transfers,   15,   115,   116. 
Funds,   366   to   394. 
Funds  vs.  accounts,  389. 
Fund, 

Contingent,  392,  403. 
Depreciation,   393. 
Redemption,  390,   1059,   1080. 
Reserve,  391,   621   to  626. 
Sinking,   369   to   387. 
Funded   Debt,   368. 

Functions   of   a   Modem  Bank,   1042, 
1048. 


Geometrical    series,   364,   365,   374   to 

378. 
General  ledsrer,  556. 

Partnership,    13. 

Proxy,  232. 

Stock,  232. 
Goodwill,  416,  1278. 

Account,  416. 

As  an  asset,  416. 
Gold  bonds,   351. 

Government   bonds,   352,  353,   1132. 
Guaranty,  857,  1280. 
Guaranteed  stock,  48,  297. 


History  of  accountancy,  1208  to  1218. 
Holding  companies,  61,  418,  468. 

How  formed,  468. 
Honest  mistake   does  not   invalidate, 

47. 
Horizontal  ledger,  517  to  519. 


Impairing  a  partnership,  13. 
Impairment  account,  404,  425,  743. 
Important  court  decisions,  43,  44,  65. 

Points,  re-transferSj  260. 
Income  account,  408. 

Bonds,  342. 
Income  expense,  409. 
Incorporating  estate  of  deceased  per- 
son, 748  to  759. 

Living  person,  760,  761. 

National  bank,   1049. 

Without  capital,  900  to  908. 
Increasing  capital  stock,  190,  470  to 
473. 

Preferential  dividend,  299. 
Inherent  powers,  what  are,  73. 
Insolvent  corporation,  55,  58. 

Partner,   16. 

Stockholder,   16. 
Insolvency   proceedings,    426. 
Instalment,  459,  685,  et  seq. 

Dividend,  487,  496. 

Book,   551. 

Payments,  591  to  596. 

Scrip,    250. 
Book,  251,  552. 
Interest,  1088  to  1100. 

Accurate,  1093,   1094. 

Compound,  1095  to  1100. 

Six  per  cent  method,  1090. 

Thirty- six  per  cent  method,  1091. 

Rates,    legal    and   contract,   65,    99, 
220,  1171   to   1216. 
International   comity,    1035. 

Settlements,  1038,  1039. 
Intrinsic  values,  356,  1020. 
Invalid   transfer,   159. 
Invalidating    securities,    1135. 
Investing  in  securities,  14,  49. 
Investment    account,    434,    435,    1011, 

1016. 
Invoice  register,  522  to  524. 
Involution,   1096. 
Involuntary  dissolution,  1302. 
Issuing  bonds,  14,  60,  318,  319. 

Stock,  47,  83,  158,  250. 

Full  capital  to  one  person,  693. 
Is  subscription  binding,  245. 


Joint  stock  companies,  464. 
Judgment  of  directors  final,  47,  83. 


Kinds  of  corporations,  2. 
Stock,  48  and  84. 


Laws   of   various   states,   9,    1171    to 

1216. 
Lawful  reserve,   1053. 

How  computed,  1054  to   1064. 
"Lame   duck,"   1161. 
Land   grant   bonds,   337. 
Legal   interest,   65,   99,   220,    1171    to 

1216. 
Legal  and  equitable  titles,  260. 
Letters  of  credit,  1041. 
Levying    assessments,    53,    169,    170, 

762  to   792. 
Liability, 

Double,  462,  1052. 

Limited,   460. 

Proportionate.    461. 

Unlimited,   463. 

Ceases,  when,  156. 

For  acts  of  officers,  17. 

Of    directors,    32,   79. 

Of  partners,  17. 

Of  stockholders,   15,  17,  43,  51,  88, 
89,    116,   155,   825. 

Of  transferee,  260,  1052. 
Liabilities, 

Capital,  448. 

Contingent,   450. 

Fixed,   448. 

Passive,  448. 

Trade,  449. 
Liberal  corporation  laws,  25,  128. 
License  tax,   195. 
Listing   stocks,   1108. 
List  of  stockholders,  37,  80,  237. 
Liquidation,  59,  1018  to  1030. 

Companies,    1030. 
Liquidating     liabilities     with     stock, 

959,  1018. 
Liquidators   buying   up   stock,    1021. 
Logarithms,  365.  385,  388. 
Loan  ledger,   1068. 
Loaning  money   on  stock  prohibited, 

79. 
Long  of  stocks,  1138. 

M 
Majority  necessary  to  hold  meeting, 

145. 
"Making  a  turn,"  1149. 

Bv-laws,  22. 
Market   Value,   356. 
Manufacturing   account,   422,   1005. 
Manner  of  earing  for  contracts,  255. 

Of  Trtaking  transfer,  261. 
Married  Woman's  Rights,  160. 
Measuring  value  of  privileges,  24. 
Meeting   of  directors  and   stockhold- 
ers, 40,  71,  80. 
Record  of,  must  be  kept,  163,  164. 


Mergers,  61,  99. 

Merging  corporations,  922  to   1005. 
Merging  two  partnerships,  909  to  921. 
Merging    interests    without    merging 

capital,  900  to  1005. 

900   to   1005. 
"Milking  the  Market,"  1150. 
Mine  accounting,  556  to  590. 
Minors  and  incompetents'  stock,  146, 

750,  756. 
Mint  charges,  558. 
Minute  book,  218. 
Minutes    in    extended    form,    218    to 

221. 
Mortgages,   1292. 

Mortgaging  property,  30,  73,  192. 
Municipal  bonds^  355. 

Corporations,  4. 
Must  transfer  stock,  161. 

N. 

Name  of  Corporation,  10. 

Must  be  adhered  to^  10. 
Nature   of  a   corporation,    1. 
Necessity  of  accepting  charter,  8. 

Of   corporate   seal.    10(a). 
New  Jersey  corporation  laws,  26  to 

65. 
Nominal   gain,    800. 

Value,  356. 
Non-assenting  stock,  301,  315. 

Assessable,    301,    315. 

Cumulative,    48,    296. 

Voting,   48,   80. 

Resident    owners,    162. 
Notice    of    assessment,    53,    90,    171, 
1/2,  173. 

Of  meeting,  40,  71. 

Of  sale,  o3,  90. 
Number  of  corporators,  23,  69,  103. 
N.    Y.    Stock    Exchange,    1105,    1109, 
1110. 

0 
Officers,  38,  87. 

Duties   fixed   bv   by-laws,   225. 
Opening   bank   books,    1084,    1085. 
Organization  expenses,  917,  919,  724. 
Organizing  with  part  stock  and  part 
bonds,   745   to  747. 

With   surplus,  745,  746. 
Origin  of  banks,  1032. 
Over-capitalization,   656. 


"Panics,"   1157. 

Par  of  exchange,  1038. 

Parol   Proxy,   228. 

Partner   may  bind  firm   while  he   is 

insolvent,  12. 
Partners   severally  liable,   ^9. 


Partnership,    1296. 

Disadvantages,    12   to    21. 

Conversions,    849    to    921. 

Powers,    12. 

Settlements,    1017. 

With  corporation,  1006  to  1017. 
Patent  account,  417,  418. 

Rights,   808  to   818. 
Paying  creditors,  59. 

For   stock,   47,   83,  250,   263,  591. 

For  stock  with  notes,  843,  871. 
Pay  roll,  575,  576. 
Penalty  for  usury,  65  and  1171(a)  to 

1216(a). 
Permanent  assets,  527,  443,  1237. 

Organization,    218. 
Permanency  of  corporation,  21. 
Petition    to    distribute    unsubscribed 

stock,  817. 
Petty    ledger,    542,    543. 
Philosophy    of    depreciation,    394    to 

399. 
Place   of  meeting,    153. 
Pledged  stock  may  be  voted,  80. 
Pledger  may  vote,  when,  80. 
Pledgee  may  vote,  when,  80. 
Pledgee  not  a  stockholder,   156. 
"Point,"  1140. 

Points   about   transfers,   260,   262. 
"Pool,"   1157. 
Postponing   election,   147. 
Potential   powers,   21. 

Obligations,   389. 
Powers   of   by-laws,   34,   35,    76,    138, 
225    227. 

Of  corporations,  22,  29,  31,  32,  72, 
74,    103,    143,    188." 

Of  directors,  12,  30,  53,  75,  78,  143. 
Power  of  attorney,  special,  229,  230. 

General,   232,   233,    1294. 
,    Of   substitution,    230,    233. 

To  make  by-laws,   76. 

May  not  be  assumed,  189. 
Preliminary  meetings,  204,  205. 
Preferred  stock,  14,  49,  292,  293,  295, 

296,  597. 
Premium   account,  320,  321,  386,  615 

to  620. 
Present  values,  how  obtained,  383. 
Present  value  table,  384. 

Worth,  404,   1102. 
Preserving   estate   an   integer,    760. 
Presumptive    existence,    117. 

Evidence,  8. 
Preventing     manipulation     of     stock, 

80. 
Prior  lien  bonds,  338. 
Principal  office,  36. 
Private   corporations,   58. 

Ledger,  556,  1245. 


Problems    and    bond    values    356    to 

365. 
Profit  and  loss  account,  410,   1231. 
Profit  defined,  456. 

on    circulation,    1082. 
Promoters'  stock,  840. 
Promoter  gets  bonus,  909. 
Proportionate    liability,    461. 
Prorating  unsubscribed  stock,  816  to 

824. 
Protecting  creditors,   128. 
Proxy,  general,  232,  1295. 

Special,   229. 

How  executed,  148. 

Invalid,  when,   148. 
Public    corporations,    5,    8. 
Public  service   corporations,  4. 
Publication  of  articles,  107. 
"Puts"  1141. 


Qualifications  of  auditors,  1250. 
.   Of  directors,  32,  77. 
Quasi-public    corporations,    4. 
Quick  assets,  367,  389,  445. 
Quorum  of  directors,  143. 
Of  stockholders,  37,  138. 


R 


Rahill's  petty  ledger,  542,  543. 
Realization    and    liquidation,    430    to 

433,  1022. 
Rebate  account,  654,  685. 
Receiver,  1018,  1288. 
Receipts    and    disbursements,    1234. 
Redemption  of  stock  at  par,  1022. 

Below  par,   1004. 
Reducing  capital  stock,  734  et  seq. 

Preferred    stock    to    common,    627, 
633. 

Stock  to  create  surplus,  742. 
Requisites  of  public  accountants,  659. 
Reserve 

Account,  389. 

Fund,  391. 

Banks,  1053,  1056. 

Requirements,   1053. 
Resolution  of  acceptance,  856. 
Returns  book, 

Cash,  534. 
Credit,  536. 
Revenue  account,  405,  1229. 

Receipts,   406. 
Reversion  of  stock,  793. 
Roll  call,  238. 
Royalty  account,  613,  614. 
Rules    for    delivery    of    stocks    and 
bonds,  1114. 


Sales  Register,  529,  533. 

Scope    of    articles    or    certificates    of 

incorporation,  32,  86. 
Scrip    book,    251. 

Instalment,    250. 
Seal,  when  use  is  necessary,  11. 
.  .Not  necessary,   11. 
Secret   reserves,   403. 

Not  necessary,  403. 
Selling  agency,   992. 
"Selling  short,"  1139. 
Selling    Stock    at    a    discount,    634 
to  657. 

At  premium,  615  to  620. 

On    instalment,    549,    591    to    596, 
737. 

the  bonds,   323. 
"Sell  buyer  3,"  1163. 
"Sell  Seller  3,"  1164. 
Seller's  option,   1159. 
Short  form  of  by-laws,  224. 

Of  preferred  certilicate,  294. 

Interest  rules,  1088  to  1100. 

Of  stocks,  1139. 
Single  entry,   1222. 
Sinking  funds,  369  to  388,  434  to  436. 
Sinking   fund   account,   322. 

Construction  of,  370  to  386. 
Sinking    fund    vs.    sinking    fund    ac- 
count,  322. 
Simplify     complexity      of     business, 

corporations,   1. 
Special  meetings,  how  called,  154. 
Specimen  articles,  209.,  210. 

By-laws,   222  to  224. 
Special   proxy,   229. 
"Spread,"   1143. 
"Spread   eagle,"   1145. 
State  Board  of  Accountancy,  1220. 
State  bonds,  354. 

Control    of   corporations,   21(b). 
Statement    of    affairs    and   condition, 
441,  442,   1226. 

Of  assets  and  liabilities,  439,  1227. 

Of  eaminfTs  and  dividends,  1068. 

Of    income    and    expenditure,    438, 
1235. 

Of  receipts  and  disbursements,  437, 
1234. 
Sterling,   1038. 
Stock, 

Account,   548. 

Capital,  49,  291. 

Certificate,  256,  290. 

Common,  49,  291. 

Clandestine,   314. 

Cumulative   preferred,  48,  295. 

Deferred,  48,  300. 


Founders,   48,   316. 

Guaranteed,  48,  297. 

Non-assenting,  315. 

Non-cumulative   preferred,   48,   296. 

Non-voting,  48,  50,  80. 

Preferred,  48,  292,  597. 

Treasury,   302  to   304. 

Watered,  65,  311. 

As  collateral,   14,  79. 

Allotment,  469. 

Converted  into  bonds,  49. 

Discount,   634   to   657. 

Dividend,   78,  497   to   500,   819. 

Donation,   665   to   682. 

Exchanges,  1105  to  1170. 

Journal,   268   to   274. 

Ledger,  270,  272  to  286. 

Paid  for  in  notes,  843,   871. 

Paid  for  in  instalments,  591  to  596. 

Preferred  as  to  dividends  and  cap- 
ital, 49. 

Rebate,  654,  685  to  688. 
Stock  and  transfer  book,   165. 
Stockholders  as   bondholders,  49. 

Allowed  to  examine  books,  32,  112. 

Not  allowed  to  examine  books,  32. 

Liability,  15,  17,  43,  51,  88,  89,  116, 
155,  825. 

Meeting,  40,  40(a). 

Of  record,  40(a). 

Not  creditors,  49. 

Permitted    to    invest    in    company 
securities,  14. 

What  constitutes,   156,   157. 
Subscription  book,  242. 

Lists,  246,  248. 

Is  a  contract,  52,  244,  245. 
Succession  by  corporate  name,  3,  22, 

72,  101. 
Supreme  Court  decision  on  liability, 

43. 
Surplus  Account,  404. 
Suspense  Account,  411. 
Symposium  on  capital  stock,  548. 
Syndicate,   467,   1152. 


Tally  sheet,  240,  241. 

Technical    exchange    terms,    1136    ta 
1170. 

Tender    of    property    to    corporation, 
694,  701,  703. 

•  Of  partnership  interests  to  corpor- 
ation, 854. 

Term  of  proxy  limited,  148. 

Theory  of  capital  stock.  289. 
Of  accounts,  1222  to  1270. 
Of  diminishing  value,  397,  399. 

Thesis    on    working    capital,    830    to- 
835. 


Those  entitled  to  vote,  40(a),  113. 
Title  to  property,  in  a   partnership, 
16. 

In  a  corporation,  16. 

To  stock,  legal  and  equitable,  260. 
Trade  liability,  449. 
Trading  account,  419,  1230. 

Statement,  420,  454  to  456. 
Transfer  agent,  261. 

Books,  40(a),  261,  262,  284. 

As   collateral,  83. 

Fraudulent,   15,   115,   116. 

now  made^  41,  159. 
Transferring  stock,  37,   83,   112,   113, 

159. 
Treasury  stock,  302  to  304,  555. 
True   discount,   1103. 
Trusts  defined,  465. 
Trust  company,  36,  261,  323. 

Fund,  21(b). 
Trustee,  1289. 

May  vote  stock,  80. 

"Sub.  modo,"  260. 
Trial  balance,  584,  1224. 
"Turnover,"  what  it  means,  456. 
Two-floor   corporation,  842. 
Two  titles  in  every  certificate,  260. 


Ultra  vires,  1.  17,  1276. 
Underwriting  companies,  323. 
Unfunded   debts,   368. 
Unification     of     forty     corporations, 

900  to   1005. 
Unlimited  agency,  7. 

Liability,  21,  463. 
"Unlawful  dividends,"  44. 
Unclean  bonds,  1135. 
Use  of  seal,  H,  29. 
Usual  powers  of  partners,  12. 
Usury,  12V/. 


Vacancies,  how  filled,  39,  144. 

Valid  transfer,  159. 

Values    of    stocks    and    bonds,     356 

et  seq. 
Value     of     a     new     system,     how 

measured,  21(b). 
Voiding  election,  145. 
Vote  to  mortgage,  192. 

To  remove  directors,  12. 
Voting,  80. 

By  proxy,  80,  148,  236. 

Pledged   stock,   80. 

Stock  of  minors,  incompetents  and 
deceased   persons,   146. 

Trusts,  466. 


Voucher  Record,  expense,  526,  527. 
Invoice,  523  to  525. 
System,  1240,  1241. 


W 


313. 


sale. 


208. 


Watered  stocks,   65,  311, 

Decision  against,  65. 
Watering  stock,  836  to  839. 
Warranty,  1281. 
Wash  sales,  1146. 
Waiving    notice    of    delinquent 

187. 
Weakness  of  liberal  laws,  128. 
What  articles  "may"  contain, 

"Must"  contain,  207. 
What  proxy  indicates,  231. 
What  is  interest,  1089. 
When 

Corporation   is  not  bound   by   acts 
of  its  officers,  17. 

Liability  ceases^  156. 

Seal  must  be  used,  11,  29. 

Stock  can  not  be  voted,  37,  113. 

Stock  shall  be  void,  158. 

Transfer  does  not  relieve,  155. 

Transfer  is  absolute,  41. 
Who   are   stockholders,   156,   157. 
Working  capital,  308  to  310,  667  ta 

682. 
Working  capital,  a  thesis  on,  830 
835. 


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^^m-; 


THIS  BOOK  IS  DUE  ON  THE  LAST  DATE 
STAMPED  BELOW 


AN  INITIAL  FINE  OF  25  CENTS 

WILL  BE  ASSESSED  FOR  FAILURE  TO  RETURN 
THIS  BOOK  ON  THE  DATE  DUE.  THE  PENALTY 
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OVERDUE. 


I 


M 


JW}      lIDec'eiSF 


MAY     I  0  193 


^UN   3    1943 


16Nov'600H 


fiPiCi-n  -o 


NOV    9  1960 


EC'D  LD 


DtCl2  1961 


ii  Jan'630Tf 


iAfy  7     jp■;-^ 


$ 
1 


LD  21-95m-7,'37 


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